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It's that mortgage time again
27 June 2006
Many homeowners will be refixing their mortgages in the next few months and for most it will be "same again please". John McCrone finds that interest rates may have risen but consumers can still expect a good deal.
EVERY country does it differently. In the United States, they go for 15-year and even 30-year fixed-rate mortgages. In Britain or Australia, nearly 80 per cent of houseowners with mortages are on variable rate deals.
In New Zealand, 80 per cent of us are on short-term fixed-rate mortgages with two years having become the norm. During the next six months, a large chunk of these deals will be coming up for renewal and people will have to make that difficult decision of what to do.
The bad news is that rates will be about one percentage point higher this time around. Those who fixed at 7 per cent face a rate of about 8 per cent now.
But Steven Anderson, of financial analyst Cannex, says the good news is that the banks are still locked into a rate war, so fixed-rate deals will continue to be as cheap as they possibly can be.
Where banks have maintained a decent margin of about two percentage points on their variable rate mortgages, margins on their fixed-rate offerings have been trimmed to a wafer-thin 0.7 percentage points.
Mr Anderson says the banks do not like it, but they do not have much option and so most consumers will have a simpler than expected choice about what to do next. For most, it will be a case of "same again please" as the majority roll over for yet another two years.
Of course, there are plenty of homeowners who really ought to be taking the chance to think a little more carefully about how they structure their mortgages – especially if they have not yet split, taking out a spread of fixed-rate terms and then throwing in a little floating rate for flexibility.
But first, why does New Zealand seem to have this thing about short-term fixed-rate mortgages?
Mr Anderson says the answer is complex but mostly it comes back to New Zealand being a small country with a volatile economy. Smallness means our interest rates start higher than elsewhere. Overseas lenders see us as a risky bet and that pushes our rates up by about one percentage point. The situation is not helped by our being a nation of poor savers. There is less local money coming into the banks to be then lent out as mortgages.
Smallness also means our economy suffers sharper swings. The Kiwi dollar is up and down like a yo-yo, and our interest rates get bounced around as a result.
Bank of New Zealand chief economist Tony Alexander says for example, the floating rate got up to 11.25 per cent in 1998 and five-year fixed rates were looking attractive at just 9.3 per cent. But six months later the floating rate had plummeted to 6.5 per cent.
AdvertisementAdvertisementWith this sort of volatility, a two-year fixed-interest mortgage has become the most comfortable choice for both the banks and customers.
In Britain and Australia, where the cycles are smoother, floating rate mortgages still seem a sensible deal.
The US mortgage market is completely different because mortgages there are backed by a government-sponsored secondary bond market. There is a huge weight of money sitting in so-called Fannie Mae and Freddie Mac bonds. This pool of capital then averages the cost of loans over many years, making it possible to offer 30-year deals at about 6 to 7 per cent.
In New Zealand, variable rate mortgages are pegged to the official cash rate set by the Reserve Bank. That stands at 7.25 per cent. So once a 2 per cent margin has been added, a mortgage comes out at more than 9 per cent.
However, a curious opportunity arises with fixed-rate deals because the big banks can take advantage of the cheaper money available overseas. They can import this capital on one and two-year fixed-rate "swaps".
Mr Anderson says the advantage is fractional but worthwhile. The banks then want to lend the money out in the same fashion to match risk with risk. Rather than taking chances with the volatile OCR, if they are borrowing on a fixed two-year deal, they will want to lend it out as a fixed two-year deal.
So this slight difference between domestic and foreign-sourced cash has made fixed-rate mortgages the commercial battleground in New Zealand.
The trend became established some years back, but the pattern really became set in late 2004 when the BNZ introduced its "unbeatable" campaign, paring fixed-rate deals to the bone. All the other banks were forced to follow suit.
Then the availability of good deals prompted a lot of homeowners to refinance at much the same time, creating a lump of people tied to the same two-year cycle. During the next six months, these customers will again be up for grabs as they refix their mortgages.
Mr Anderson says the banks would like to push their margins back up but the continuing competition means they appear to have little choice except to keep the price war going for at least another round.
So the equation for most people seems simple.
However, mortgage experts like Christchurch broker David Tillman of David Tillman Mortgage Link says homeowners should still look beyond the headline rates when they refix. And they should certainly consider their wider financial picture.
Mr Tillman says the banks obviously rely on a certain degree of customer inertia when it comes time to rewrite a mortgage. A great many people will simply roll over without too much thought. It may take a difference of up to 0.5 per cent to spur them into chasing a cheaper deal.
Mr Tillman says the banks are also good at inserting various charges, like a $250 refix fee, to make their margins a little more respectable. However, once a customer or a broker begins to shop around, the banks will prove rather negotiable.
He says the deals will vary almost week by week, the banks being very sensitive to small changes in their own borrowing rates. Yet ask about and 0.15 per cent can come off the advertised fixed-rate deal. Or the refixing fee will be swiftly waived.
This kind of wheeling and dealing is harder for customers who deal directly with their banks, but for the 30 per cent of the country that now use mortgage brokers it has become normal practice, Mr Tillman says.
Though it is wise to shave every last fraction of a per cent off your mortgage rate, he says it is also smart to structure the mortgage as a split loan.
To help insulate against the shock of future interest rate rises – after all, who really knows whether 2008 will be a good or bad time to be refixing again? – most people should have their mortgage spread across a range of one-, two- and three-year periods.
Then, for flexibility, they also ought to have 10 or 20 per cent of the mortgage on a variable rate, even though it will cost a couple of per cent more.
Mr Tillman says a variable rate mortgage can usually be repaid early without penalties and the famous "cup of latte" calculation shows why everyone ought to be making the effort to repay a mortgage as fast as they can.
Most people probably feel they can afford a small luxury like a $3.50 latte daily. But that adds up to about $106 a month. Use it instead to help pay down a 25-year $200,000 mortgage at 8 per cent interest, then it will knock an astonishing $28,700 off the total payments. For the price of a cup of coffee, the mortgage can be repaid four years early.
Mr Tillman says another bonus to look out for with a variable rate mortgage is that it often comes with the offer of free current account banking. This could be worth a few hundred dollars a year to some people.
Many householders might also want to arrange some sort of line-of-credit or revolving mortgage. Mr Tillman says you might borrow $200,000 to buy a house and then build in the right to extend it out to $210,000.
This gives you the ability to take out a cheap loan in case of an emergency – say if the plumbing goes wrong or the roof springs a leak.
There is certainly plenty of scope to fine-tune your mortgage deal these days, he says. So though the decision this year might seem simple enough – look for the cheapest fixed-rate deal and say "same again please" – the moment you refinance is a good time to face up to your financial future and work out what is really the best all-round deal to suit your circumstances.
"A lot of people may have been just buying that new house two years ago and all they would have been worried about was getting through the front door. Now things will have settled down and they should really be taking the time to think seriously about their mortgage."
http://www.stuff.co.nz/stuff/0,2106,...5a1864,00.html
27 June 2006
Many homeowners will be refixing their mortgages in the next few months and for most it will be "same again please". John McCrone finds that interest rates may have risen but consumers can still expect a good deal.
EVERY country does it differently. In the United States, they go for 15-year and even 30-year fixed-rate mortgages. In Britain or Australia, nearly 80 per cent of houseowners with mortages are on variable rate deals.
In New Zealand, 80 per cent of us are on short-term fixed-rate mortgages with two years having become the norm. During the next six months, a large chunk of these deals will be coming up for renewal and people will have to make that difficult decision of what to do.
The bad news is that rates will be about one percentage point higher this time around. Those who fixed at 7 per cent face a rate of about 8 per cent now.
But Steven Anderson, of financial analyst Cannex, says the good news is that the banks are still locked into a rate war, so fixed-rate deals will continue to be as cheap as they possibly can be.
Where banks have maintained a decent margin of about two percentage points on their variable rate mortgages, margins on their fixed-rate offerings have been trimmed to a wafer-thin 0.7 percentage points.
Mr Anderson says the banks do not like it, but they do not have much option and so most consumers will have a simpler than expected choice about what to do next. For most, it will be a case of "same again please" as the majority roll over for yet another two years.
Of course, there are plenty of homeowners who really ought to be taking the chance to think a little more carefully about how they structure their mortgages – especially if they have not yet split, taking out a spread of fixed-rate terms and then throwing in a little floating rate for flexibility.
But first, why does New Zealand seem to have this thing about short-term fixed-rate mortgages?
Mr Anderson says the answer is complex but mostly it comes back to New Zealand being a small country with a volatile economy. Smallness means our interest rates start higher than elsewhere. Overseas lenders see us as a risky bet and that pushes our rates up by about one percentage point. The situation is not helped by our being a nation of poor savers. There is less local money coming into the banks to be then lent out as mortgages.
Smallness also means our economy suffers sharper swings. The Kiwi dollar is up and down like a yo-yo, and our interest rates get bounced around as a result.
Bank of New Zealand chief economist Tony Alexander says for example, the floating rate got up to 11.25 per cent in 1998 and five-year fixed rates were looking attractive at just 9.3 per cent. But six months later the floating rate had plummeted to 6.5 per cent.
AdvertisementAdvertisementWith this sort of volatility, a two-year fixed-interest mortgage has become the most comfortable choice for both the banks and customers.
In Britain and Australia, where the cycles are smoother, floating rate mortgages still seem a sensible deal.
The US mortgage market is completely different because mortgages there are backed by a government-sponsored secondary bond market. There is a huge weight of money sitting in so-called Fannie Mae and Freddie Mac bonds. This pool of capital then averages the cost of loans over many years, making it possible to offer 30-year deals at about 6 to 7 per cent.
In New Zealand, variable rate mortgages are pegged to the official cash rate set by the Reserve Bank. That stands at 7.25 per cent. So once a 2 per cent margin has been added, a mortgage comes out at more than 9 per cent.
However, a curious opportunity arises with fixed-rate deals because the big banks can take advantage of the cheaper money available overseas. They can import this capital on one and two-year fixed-rate "swaps".
Mr Anderson says the advantage is fractional but worthwhile. The banks then want to lend the money out in the same fashion to match risk with risk. Rather than taking chances with the volatile OCR, if they are borrowing on a fixed two-year deal, they will want to lend it out as a fixed two-year deal.
So this slight difference between domestic and foreign-sourced cash has made fixed-rate mortgages the commercial battleground in New Zealand.
The trend became established some years back, but the pattern really became set in late 2004 when the BNZ introduced its "unbeatable" campaign, paring fixed-rate deals to the bone. All the other banks were forced to follow suit.
Then the availability of good deals prompted a lot of homeowners to refinance at much the same time, creating a lump of people tied to the same two-year cycle. During the next six months, these customers will again be up for grabs as they refix their mortgages.
Mr Anderson says the banks would like to push their margins back up but the continuing competition means they appear to have little choice except to keep the price war going for at least another round.
So the equation for most people seems simple.
However, mortgage experts like Christchurch broker David Tillman of David Tillman Mortgage Link says homeowners should still look beyond the headline rates when they refix. And they should certainly consider their wider financial picture.
Mr Tillman says the banks obviously rely on a certain degree of customer inertia when it comes time to rewrite a mortgage. A great many people will simply roll over without too much thought. It may take a difference of up to 0.5 per cent to spur them into chasing a cheaper deal.
Mr Tillman says the banks are also good at inserting various charges, like a $250 refix fee, to make their margins a little more respectable. However, once a customer or a broker begins to shop around, the banks will prove rather negotiable.
He says the deals will vary almost week by week, the banks being very sensitive to small changes in their own borrowing rates. Yet ask about and 0.15 per cent can come off the advertised fixed-rate deal. Or the refixing fee will be swiftly waived.
This kind of wheeling and dealing is harder for customers who deal directly with their banks, but for the 30 per cent of the country that now use mortgage brokers it has become normal practice, Mr Tillman says.
Though it is wise to shave every last fraction of a per cent off your mortgage rate, he says it is also smart to structure the mortgage as a split loan.
To help insulate against the shock of future interest rate rises – after all, who really knows whether 2008 will be a good or bad time to be refixing again? – most people should have their mortgage spread across a range of one-, two- and three-year periods.
Then, for flexibility, they also ought to have 10 or 20 per cent of the mortgage on a variable rate, even though it will cost a couple of per cent more.
Mr Tillman says a variable rate mortgage can usually be repaid early without penalties and the famous "cup of latte" calculation shows why everyone ought to be making the effort to repay a mortgage as fast as they can.
Most people probably feel they can afford a small luxury like a $3.50 latte daily. But that adds up to about $106 a month. Use it instead to help pay down a 25-year $200,000 mortgage at 8 per cent interest, then it will knock an astonishing $28,700 off the total payments. For the price of a cup of coffee, the mortgage can be repaid four years early.
Mr Tillman says another bonus to look out for with a variable rate mortgage is that it often comes with the offer of free current account banking. This could be worth a few hundred dollars a year to some people.
Many householders might also want to arrange some sort of line-of-credit or revolving mortgage. Mr Tillman says you might borrow $200,000 to buy a house and then build in the right to extend it out to $210,000.
This gives you the ability to take out a cheap loan in case of an emergency – say if the plumbing goes wrong or the roof springs a leak.
There is certainly plenty of scope to fine-tune your mortgage deal these days, he says. So though the decision this year might seem simple enough – look for the cheapest fixed-rate deal and say "same again please" – the moment you refinance is a good time to face up to your financial future and work out what is really the best all-round deal to suit your circumstances.
"A lot of people may have been just buying that new house two years ago and all they would have been worried about was getting through the front door. Now things will have settled down and they should really be taking the time to think seriously about their mortgage."
http://www.stuff.co.nz/stuff/0,2106,...5a1864,00.html