Mortgage holders warned over fixing rates

Mortgage brokers are recommending householders ignore banks' attempts to woo them on to two-year, fixed-rate mortgages, and instead take a punt bank rates will fall further.

All banks except ASB are offering a lower two-year rate than six-month rate on home loans, but mortgage brokers say the OCR is tipped to fall as much as a full percentage point from 6.5 percent to 5.5 percent.

Sue Tierney, of Mortgages By Design, recommends people who are coming off a fixed period on their mortgages hold off fixing for longer periods until rates come down between now and March next year.

Because of the expected falls, Tierney said people should think carefully about market-leading rates such as Kiwibank's two-year rate, now the best of the big banks at 7.79 percent.

Broker Lawrence Diack said gambling on rates coming down was tempting. Getting a lower rate was one of the very few ways families could reduce outgoings dramatically.

"For many families the mortgage is the biggest bill," Diack said.

"If they can get a better rate they can literally save $40 or $50 a week. There's no other bill they can say that for."

But he warned: "The big unknown is how much the banks will actually pass on."

Roost's Miranda Caird said it was certain some of it would be passed through.

"There'd be an uproar, if they didn't."

But if the OCR fell one percentage point mortgage rates might not track it down to the full extent, she said. However, Kiwibank, which sources most of its funding cheaply from depositors, is likely to keep pressure on rivals by keeping its rates low.

But punting on rates is not for everyone, said Caird.

Locking in for six months or choosing a floating rate meant paying a higher mortgage bill in the short term in the hope of making savings later.

That required people to do their sums carefully before deciding to take the risk, although for those with larger mortgages annual savings of thousands were on offer if a rate of 0.5 points lower could be secured.

For homeowners on a budget, it was often better to fix rates at an affordable level to get some certainty, but she said "certainty comes at a price".

Those locking in their mortgage for longer periods now may well look back with regret in six months.

None of the brokers believed there were signs that floating rates, which are cheaper to fund for the banks, would become cheaper than fixed rates.

Across the Tasman, homeowners pay a premium for the certainty of knowing what their mortgage repayments will be six months, a year or two years in the future.

The opposite has been happening in New Zealand, said Tierney.

At ASB, for example, the gap between its two-year fixed rates and its floating rates was 2.1 percentage points. A year ago the gap was less than one point.

Tierney said banks had been quietly hiking fees on flexible mortgages such as revolving credit.

Caird said there was no reason why homeowners needed to take an all-or-nothing bet on interest rates. Cautious homeowners unwilling to take a single punt could spread their loan, locking some in for two years, some for six months and keeping some floating.

They would get some benefit of falling rates, but also a greater degree of certainty.

That was the kind of approach mortgage holders often took, rather than risk locking in what appeared a good rate today only to find they had to accept much higher rates when their investments matured.

"People shouldn't just chase rates."

For first-time homebuyers there was not much good news, said Caird. House prices may have fallen and mortgage rates are coming down, but unless they have a big deposit (20% or more), or parents willing to put up guarantees, they will struggle to find any bank that will lend to them.

Not only are the banks unwilling to lend more than 80% of the value of a home (brokers say ANZ is the only bank that is still willing to go beyond 80% on ordinary home loans) but they have reduced the multiples of salary they will lend on and reintroduced long-unused policies such as requiring homebuyers to show a history of saving and to have banked with the lender for six months or more.

"They just haven't got the money to lend," Caird said. "The criteria have come full circle. We have got back to where we were when I started."

Caird was one of the first mortgage brokers in the country, setting herself up in business in 1992 in Dunedin.

Her prediction: "It's going to get worse before it gets better."