“Mortgages – to fix or float
It’s the eternal question for homeowners: to fix or not to fix?
You make the decision, regret or rejoice, and then two years or so later you have to make it again.
If you’re in a quandary, no wonder. Seasoned economist Tony Alexander says this may be the most difficult environment for predicting interest rates that New Zealand has ever seen.
So what’s a homeowner to do?
Are you an optimist or a pessimist?
There’s no easy answer. Economists themselves can’t agree on when mortgage interest rates will rise, or whether – if you jump into a fixed rate now – you’ll be better or worse off in two or three years.
First of all, if you’ve already fixed, don’t panic. Even though most economists are now saying you’d be better off floating, they also say fixed rates are unlikely to go much lower.
Translation: if you fixed pretty recently, you probably didn’t get a bad deal – just missed out on a few months paying the lower variable mortgage rate.
Chances are – like me – you were spooked by economists predicting an imminent rate hike that upped and receded thanks to wobbles in Europe and America.
Now the Reserve Bank has pushed predictions of an official cash rate hike into early next year , making those of us who rushed feel a little bit silly.
At least we weren’t alone.
ANZ, ASB, BNZ, Westpac, and Kiwibank all had more people than usual switching to fixed rates during the past two months.
For a heady three weeks, sixty per cent of BNZ customers coming off fixed loans chose to re-fix, compared with the usual 10 per cent.
By contrast most Kiwis are content to ride out the ups and downs – BNZ and ASB both say more than 70 per cent of their lending is floating.
If you haven’t fixed, should you?
BusinessDay asked three bank chief economists whether fixed or floating was a better bet right now. Two went for floating and one – just marginally – for fixed.
ANZ’s Cameron Bagrie and BNZ’s Tony Alexander backed the floating rate over the next two years.
“I don’t think there’s a big mad rush to jump into those fixed rates,” said Bagrie.
“To be expecting floating rates to be to moving up aggressively pretty quickly, you’ve got to have an expectation that the global economy is going to be relatively robust. I think that’s a very heroic assumption at the moment.”
Tony Alexander agreed: “The situation offshore is deteriorating all the time.”
Only ASB’s Nick Tuffley said fixing for two or three years would work out fractionally cheaper than floating.
“But it is very much at the margins and it wouldn’t take much to steer things a little bit either way,” he added.
Tuffley said the pre-GFC situation of pricey short term borrowing vs. cheaper long term rates had been turned on its head.
“So there’s going to be this trade-off…how much am I prepared to pay for the certainty a fixed rate gets me?”
Certainty, after all, is one thing you can’t get from a floating rate.
“The decision between fixing vs. floating is not just about cashflow,” says Bagrie. “A lot of people want the certainty a fixed rates offers.”
So if sleep is important to you, you might just opt for peace of mind.
“There’s nothing guaranteed, the floating rate could go up a long way,” says Bagrie.
How much does the OCR matter?
It’s tempting to think of the official cash rate as the sole predictor of interest rates.
But a one or two percentage point rise in the cash rate doesn’t necessarily mean mortgage rates will rise by the same amount, says Bagrie.
For example, if global economic risks reduced enough for the Reserve Bank to hike the cash rate, the same factors could make borrowing overseas cheaper – reducing the overall effect on interest rates, says Bagrie.
It works both ways, says Tuffley.
“If we do get into a really messy situation with the European debt crisis and that spills over to the European banks…it’s always possible that banks’ costs (of borrowing) do get lifted high by that.
“But if that was the case, the Reserve Bank might just opt to not lift the cash rate as much (because the inflation environment wouldn’t warrant it.).”
Sorted’s mortgage repayment calculator is a good way to work out if you can afford an interest hike.
And if you want to give your heart a flutter, check out the historic mortgage rates compiled by the Reserve Bank. A casual 15 per cent interest, anyone? Yep, it happened in 1990.
If you fix, when?
If you want to fix, economists say you probably have some time up your sleeve.
But don’t muck around too long. “There’s pressure (on fixed rates) to move up,” says Bagrie.
Fixed rates tend to move around more often than floating, says Tuffley, so it’s not a good idea to wait until after the floating rate has moved.
Right now, fixed rates are on the low side compared with what economists are predicting will actually happen to the cost of money next year.
“One important thing to bear in mind is that market doesn’t have much built in the way of interest rate increases going forward,” says Tuffley.
“If you wait too long and market starts to re-price, you may miss the boat on getting a fairly low fixed rate.”
Alexander says fixed rates are unlikely to go lower before rising.
But: “If you fix right now you’re sacrificing a low floating rate to do that, so the real questions how long can one safely stay floating before moving into fixed?”
He still says floaters have time on their sides. “If you stay floating you’re not facing the prospect of the fixed rate suddenly jumping up on you.”
But he admits waiting is always a gamble.
As for how long to fix for, all of the economists said two year and three year rates were looking much more attractive than longer terms. “I wouldn’t go longer than two years,” says Bagrie.
Hedge your bets
Remember all those post-GFC headlines about people trying to break their fixed loans?
If you fix and floating rates fall dramatically, it can be costly to get out.
Banks have complicated formulas for deciding how much to charge you, but basically they do their best to recover the difference between what you would have paid by staying on the fixed rate and what they will get by you breaking the term.
With floating there’s no penalty if you want to pay the whole amount early.
Alexander says, if he was going to fix, he would hedge his bets by leaving some of the loan floating.”