Warning for buyers as rates descend
The year is off to a cut-throat start between mortgage lending banks with ASB easing its long-term fixed interest rates, but an influential financial adviser is warning that the cheap rates could be leading Kiwi home-buyers into financial danger.
With many fixed-term rates now cheaper than floating mortgage rates, Waikato mortgage brokers said droves of their clients were switching to fixed terms, mainly six months to one year, and report their busiest pre-Christmas period since boom real estate year 2007, with particular demand from first-home buyers.
Banks were open to discounting approaches, they said.
And with BNZ chief economist Tony Alexander anticipating that fixed rates will start rising "fairly soon", given economic events overseas, and advising borrowers to start shopping around for good fixed deals, that momentum is set to continue.
But financial adviser and property investment specialist Lisa Dudson, of the Acumen company, said reading the economy tea leaves is "too unreliable" to base house purchase decisions on.
She said house-buyers should be doing their mortgage repayment sums on whether they can afford 10 per cent interest rates.
"What worries me is everyone is out there going at a hell of a pace, signing up [to mortgages] because rates are low, but for how long?
"What happens if they go up to 8 per cent or higher. Can they afford that? No-one can say when rates will go up, but it's not a matter of ‘if'. We've seen rates of 10 per cent a couple of times in the past 10 years."
Ms Dudson said the focus on cheap fixed rates was also misguided.
"Yes, you're protected [for whatever term] but what happens on the other side when you come off that rate? They might have gone up quite a bit. People have been caught by that."
If borrowers budgeted for 10 per cent interest rates and rates did not rise to that level, they would pay off their mortgages much faster, she said.
Mr Alexander said predictions of fixed rates rising had been wrong many times in recent years so he would want to see rates actually going up before fixing.
"Until then I would sit floating or would fix one year and focus on maximising repayments."
He said interest rates would likely stay low this year, with the Reserve Bank not expected to raise the official cash rate, which influences mortgage interest rates, until 2014.
However, he expected fixed rates would rise as United States growth improved, but accompanied by growing worries about inflation and financing the US deficit.
Mr Alexander said if a borrower could get a rate of 5.5 per cent for five years they were on to a winner.
Current five-year rates are still 5.99 to 6.6 per cent.
Mortgage adviser Gary Haberfield of Mortgage Link Waikato said the only advantage of a floating rate currently was that a borrower could pay lump sums off their mortgage. Banks charge a fee to break a fixed term early.
He said banks were "very hungry" for customers and everything could be negotiated, including discounts on current interest rates and break fees.
Mr Haberfield said it was good to see first-time buyers in the market again after the recession kept them away.
Mortgage adviser Terry Meredith of Mortgages Made Easy, which serves Waikato and Bay of Plenty, said ASB's move was a sign of banks "jockeying" for position.
Westpac and SBS already had the new ASB rates in the market, he said.
Borrowers on floating rates could take advantage of the lower six to 12-month fixed rates to save some money and then return to floating rates, he said.
Mr Meredith did not foresee much change in interest rates over the next year.
- © Fairfax NZ News