Floating rates 'still better than fixed'

Fairfax Media

TO FLOAT OR NOT: Homeowners face higher interest rate costs but there is no reason to switch out of floating rates into fixed rates just yet, market commentators say.

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Homeowners face higher interest rate costs but there is no reason to switch out of floating rates into fixed rates just yet, market commentators say.

Floating rates remain lower than fixed rates at this point and while they will inevitably shoot higher than fixed rates at some point in the future homeowners can continue to save money with the variable option.

The Reserve Bank of New Zealand announced a 25 basis point increase in the official cash rate to 2.75 per cent, its first hike since July 2007.

A 0.25 percentage point increase in the floating mortgage rate on a $200,000 mortgage would increase interest costs by around $10 a week.

The change in the OCR is the first since the 50 basis point cut to the record low of 2.5 per cent in April 2009, with commentators saying that it is generally a good time to buy a house, particularly for a first-time owner.

While Reserve Bank governor Alan Bollard has put up rates for the first time in nearly three years, he is in effect taking his foot off the accelerator in terms of a stimulatory setting for the economy.

That's the view of UBS New Zealand senior economist Robin Clements, who said floating rates had been most attractive in March 2009 when they were around 5.5 per cent, and probably cheaper than fixed rates at that time.

James Lockie, director of non-bank lender Cairns Lockie said it still made sense for mortgages to use a floating rate facility. "I think that the fixed rate is so far ahead of the floating rate that people should still stay short. My pick would be staying in the variable."

In terms of buying houses, the cost of building a new house was going up and would do so further with the GST increase. But that did not necessarily mean it was the best time to buy an older house, with the possibility for buyers to wait up to a year, Lockie said.

BNZ chief economist Tony Alexander said the number on floating mortgages had increased to 30 per cent according to a statement made by Bollard in February, from around 13 per cent in June 2008.

The chance to move back into good value, five-to-seven-year fixed rates had come and gone in March 2009, he said.

"Now you would not think about those [longer] terms at all. Now it's really just a question of do I float or do I fix out to three years – you [wouldn't] go beyond that."

Alexander added that until a month ago he had advised people to remain on a floating rate, whereas since then fixing for a shorter period had also become an option.

Cautious people could be advised to fix now, but those wanting to take a bet that rates would stay lower for longer could opt to stay floating. "That's probably where I would be sitting," Alexander said.

In terms of buying a house there was probably no point in hanging on at this point for a cheaper price ahead, given a shortage of new houses, he said.

ASB chief economist Nick Tuffley said an "overwhelming" number of people had been moving to floating rates to enjoy lower borrowing costs.

From here floating rate and very short term fixed rates would, over time, start moving back up for mortgage holders.

"With what we anticipate happening with the cash rate and the likely direction of interest rates there's not a huge amount of difference in what we find in the next year or two between floating or going on to a fixed term."

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