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Interesting article on interest rates in this mornings Sunday Times:
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Interesting article on interest rates in this mornings Sunday Times:
Fix'n'float: getting the right mortgage
SUNDAY , 27 JUNE 2004
ROB STOCK explores New Zealanders' readiness to fix their mortgages for short terms.
Kiwis have gone overboard on short-term borrowing when it comes to buying a home.
The days are well past when homebuyers locked themselves into fixed-rate mortgages for the long term.
Those who did - for example, in May 1998 - learned some hard lessons.
With floating rates at 11.25%, they thought a two-year fixed rate at 9.25% was a steal. However, variable rates plummeted to 5.95% six months later.
But have borrowers over-learned the lesson and started micro-managing their mortgages to the nth degree?
According to free-to-use mortgage rate comparison website www.interest.co.nz, one third of New Zealand's $90.6 billion in home loans is fixed for just six months.
At the same time, 20% was fixed for one year, and just 13.2% for two years.
A total of just under 35% was held as floating loans, including revolving credit.
These figures apply to lenders AMP, ANZ, ASB, BNZ, Kiwibank, HSBC, National Bank, TSB Bank and Westpac.
Mortgage brokers and bankers have expressed surprise at Kiwis' willingness to fix for such short terms, particularly as many banks charge a $250 documentation fee to refix at the end of the period.
Over two years, refixing six-monthly adds $1000 to the cost of borrowing, and creates a lot of work.
A $100,000 loan fixed for six months and avoiding a 0.7% rate hike would save about $700 in a year. But if the householder is paying $250 every six months to refix the loan, the saving is only $200.
That's a small return for a lot of effort, some say.
Miranda Caird, of mortgage broker Mortgage Choice, says the only way to make the strategy pay handsomely is to pay an annual fee for the right to be part of a scheme - such as Westpac's Redpack. This would cost $150 for a loan of up to $150,000, and cover all redocumentation fees.
Serial short-term borrowers may also be introducing a new kind of risk into their borrowings. Changed circumstances can affect ability to repay. When it came to refinancing, someone with reduced income might find the bank a lot less friendly to deal with, says Caird.
The bank would be within its rights to ask for a "statement of position" and reassess its relationship with the borrower, and that could involve higher interest rates, or an invitation to take their business elsewhere.
Some commentators say the sale and marketing of loans may be the cause of the short-term fixation.
Six-month rates are certainly the best on the market. Though the Reserve Bank says they are basically funded by banks in the same way as is floating-rate mortgage money, fixed rates are up to 1% cheaper from the main lenders.
For shoppers buying on headline rate alone, that may be too attractive to ignore, says David Chaston of interest.co.nz.
Caird, too, sees six-month rates as bait to catch new customers.
"I suspect most of that is a sales pitch. The banks are all aiming for the same business and that's how they do it."
But the banks are far from convinced that the statistics, calculated by the Reserve Bank, reflect the way people actually manage their mortgages.
Westpac's Vince Clark, product manager for home loans, says most new customers wanting to fix do so over periods of two years, "trying to see themselves through the rate cycle".
Caird agrees and says that, with interest rates on the rise in the short term, "anyone fixing for one year or less is saying OI don't care where interest rates are in six months or a year'."
In a climate of rising rates, which many economists expect will feature increases to base rates of as much as 75 basis points (0.75%), fixing for six months or a year could be an opportunity missed.
So how should borrowers approach structuring their mortgages?
It depends on the individual, according to Caird. Fixing a loan is about buying certainty, rather than speculating on the direction of interest rates over the longer term.
For those on a tight budget, a fixed-rate loan provides certainty that, even if rates move dramatically, they can still pay. If rates rise by the 0.75% some predict, adding $750 or more annually to a $100,000 floating-rate mortgage, many families would have trouble finding the extra cash.
Two-year fixed periods are about as long as most people are now willing to commit to. But for those with more cash, flexibility is the watchword.
With a chunk of debt in a fixed-rate loan, many people benefit from having part of their mortgage in a floating rate facility, brokers say. This might be a reducing-limit, revolving credit account.
Wizard Home Loans' John Grant says New Zealanders, compared with Australians, are gun-shy when it comes to risk.
In Australia about two-thirds of home loans are floating, compared to the 31% here, says Grant.
But for those motivated to pay their mortgage off quickly and prepared to run their finances off a credit card linked to a revolving-credit account, the savings available are much greater than those on offer through a fixed loan, he says.
Westpac's capped-rate mortgages are another option for people worried about rate rises and looking to borrow or refinance now. These put a ceiling on the interest rate of a loan. Should rates drop, however, the mortgage acts as a floating-rate loan.
SUNDAY , 27 JUNE 2004
ROB STOCK explores New Zealanders' readiness to fix their mortgages for short terms.
Kiwis have gone overboard on short-term borrowing when it comes to buying a home.
The days are well past when homebuyers locked themselves into fixed-rate mortgages for the long term.
Those who did - for example, in May 1998 - learned some hard lessons.
With floating rates at 11.25%, they thought a two-year fixed rate at 9.25% was a steal. However, variable rates plummeted to 5.95% six months later.
But have borrowers over-learned the lesson and started micro-managing their mortgages to the nth degree?
According to free-to-use mortgage rate comparison website www.interest.co.nz, one third of New Zealand's $90.6 billion in home loans is fixed for just six months.
At the same time, 20% was fixed for one year, and just 13.2% for two years.
A total of just under 35% was held as floating loans, including revolving credit.
These figures apply to lenders AMP, ANZ, ASB, BNZ, Kiwibank, HSBC, National Bank, TSB Bank and Westpac.
Mortgage brokers and bankers have expressed surprise at Kiwis' willingness to fix for such short terms, particularly as many banks charge a $250 documentation fee to refix at the end of the period.
Over two years, refixing six-monthly adds $1000 to the cost of borrowing, and creates a lot of work.
A $100,000 loan fixed for six months and avoiding a 0.7% rate hike would save about $700 in a year. But if the householder is paying $250 every six months to refix the loan, the saving is only $200.
That's a small return for a lot of effort, some say.
Miranda Caird, of mortgage broker Mortgage Choice, says the only way to make the strategy pay handsomely is to pay an annual fee for the right to be part of a scheme - such as Westpac's Redpack. This would cost $150 for a loan of up to $150,000, and cover all redocumentation fees.
Serial short-term borrowers may also be introducing a new kind of risk into their borrowings. Changed circumstances can affect ability to repay. When it came to refinancing, someone with reduced income might find the bank a lot less friendly to deal with, says Caird.
The bank would be within its rights to ask for a "statement of position" and reassess its relationship with the borrower, and that could involve higher interest rates, or an invitation to take their business elsewhere.
Some commentators say the sale and marketing of loans may be the cause of the short-term fixation.
Six-month rates are certainly the best on the market. Though the Reserve Bank says they are basically funded by banks in the same way as is floating-rate mortgage money, fixed rates are up to 1% cheaper from the main lenders.
For shoppers buying on headline rate alone, that may be too attractive to ignore, says David Chaston of interest.co.nz.
Caird, too, sees six-month rates as bait to catch new customers.
"I suspect most of that is a sales pitch. The banks are all aiming for the same business and that's how they do it."
But the banks are far from convinced that the statistics, calculated by the Reserve Bank, reflect the way people actually manage their mortgages.
Westpac's Vince Clark, product manager for home loans, says most new customers wanting to fix do so over periods of two years, "trying to see themselves through the rate cycle".
Caird agrees and says that, with interest rates on the rise in the short term, "anyone fixing for one year or less is saying OI don't care where interest rates are in six months or a year'."
In a climate of rising rates, which many economists expect will feature increases to base rates of as much as 75 basis points (0.75%), fixing for six months or a year could be an opportunity missed.
So how should borrowers approach structuring their mortgages?
It depends on the individual, according to Caird. Fixing a loan is about buying certainty, rather than speculating on the direction of interest rates over the longer term.
For those on a tight budget, a fixed-rate loan provides certainty that, even if rates move dramatically, they can still pay. If rates rise by the 0.75% some predict, adding $750 or more annually to a $100,000 floating-rate mortgage, many families would have trouble finding the extra cash.
Two-year fixed periods are about as long as most people are now willing to commit to. But for those with more cash, flexibility is the watchword.
With a chunk of debt in a fixed-rate loan, many people benefit from having part of their mortgage in a floating rate facility, brokers say. This might be a reducing-limit, revolving credit account.
Wizard Home Loans' John Grant says New Zealanders, compared with Australians, are gun-shy when it comes to risk.
In Australia about two-thirds of home loans are floating, compared to the 31% here, says Grant.
But for those motivated to pay their mortgage off quickly and prepared to run their finances off a credit card linked to a revolving-credit account, the savings available are much greater than those on offer through a fixed loan, he says.
Westpac's capped-rate mortgages are another option for people worried about rate rises and looking to borrow or refinance now. These put a ceiling on the interest rate of a loan. Should rates drop, however, the mortgage acts as a floating-rate loan.
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