Homeowners' enviable dilemma

01:36, Jun 21 2012

It's the question that many homeowners have agonised over - to fix or float?

Current market conditions have led to historically low mortgage rates, prompting many to rethink how to manage their debt.

While some believe the low rates won't last and homeowners should lock in a fixed rate mortgage, others think they've still got further to go. However, make the wrong decision and it could cost you thousands of dollars.

BNZ economist Tony Alexander suggests it doesn't have to be one or the other and the solution could be to do both.

"My advice to people is not to think so much in terms of trying to pick the bottom in the fixed interest rate cycle, because most of us are simply not going to be able to do that this time," said Alexander.

"I would think more in terms of it's a good idea to have some of my debt fixed and some sitting at floating. Then it becomes a personal preference if you go half-half or 30 per cent fixed and the rest floating. I would look at some sort of combination like that."

With more than 60 per cent of all home loans on floating interest rates, many New Zealanders are opting to float and it's easy to see why - the lowest floating mortgage rate is 5.65 per cent, a 48-year low.

Property Investors Federation president Andrew King's advice is to look at your personal finances before making a decision.

"I think what you really need to think about as a property investor is your risk," said King.
"If you've got a high amount of debt and rates spiked, would you risk having to sell your property? If so, then fix them or at least fix a portion of them. You don't have to fix or float everything."

Last week the Reserve Bank held the official cash rate, the main driver of mortgage costs, at its record low of 2.5 per cent - where it's been since March last year. The central bank forecasts imply it won't rise until next year. Economists are keeping a close eye on Europe, because if the situation worsens then floating rates are likely to drop further, but if it gets better rates will rise.

Alexander said the low mortgage rates mean now is a good time to pay off debt, as by remaining on the floating interest rate you can repay the principal faster without incurring early repayment penalties. However, fixed rates offer certainty around payments and protection from interest rate increases.

Strong competition between banks means there is a range of fixed rates at historically low levels. ASB, ANZ, National and Westpac's one-year fixed rates are all at 5.25 per cent. King said it was important to do your homework before negotiating for even lower rates.

"It's really important for property investors to crunch the numbers all the time actually, I recommend at least once a year. You look at your investment portfolio and go over it and make sure it's doing what you want it to do," said King.

"The best thing about that is you know what situation you're in. If you've got a good [cash]flow and good equity then you're in a strong position to bargain with your bank and get your interest rates as low as possible and the conditions as favourable as possible."