Borrowers advised to mix up rates

RICHARD MEADOWS
Last updated 12:37 12/12/2013

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The bulk of mortgage borrowers sitting on short-term rates will be exposed if interest rates start to rise rapidly, an economist warns.

The Reserve Bank this morning left official interest rates unchanged at 2.5 per cent, but projected rates would rise higher than previously expected over the next two years.

BNZ chief economist Tony Alexander said most mortgage holders were still sitting on floating or short-term fixed-interest rates.

"The bulk of borrowers are exposed, should the economy surge away and these interest rates rise quite a bit," Alexander said.

Borrowers are steadily moving into fixed-term rates, which now make up 57 per cent of lending, up from 44 per cent a year ago.

However, almost three-quarters are still on either floating or fixed rates of less than a year, which means rate hikes would rapidly impact interest repayments.

"To me, it reinforces the value of getting a mixture of floating and some fixed-interest rates on board," Alexander said.

People shouldn't try to second-guess the Reserve Bank's moves, as "no-one's got their interest-rate forecast right in at least half a decade".

Alexander recommended leaving some portion of the loan floating, and fixing up to 18 months, where the special deals were found.

"[And] if you can make the budget stretch to it, have a look at locking in some three to five-year interest rates, as protection against when these rates start rising," he said.

Westpac chief economist Dominick Stephens said the central bank's forecasts were very similar to current market pricing, so there were no immediate implications for mortgage holders.

"However, it was a reminder that floating mortgage rates are highly likely to rise next year," he said.

The Reserve Bank is signalling an official cash rate hike in March while Westpac is picking an April rise.

Stephens saw some opportunities for borrowers who were unaffected by the central bank's new loan-to-value ratio (LVR) speed limits.

Buyers with low deposits are being charged about 50 basis points more on their interest rates than borrowers with more equity.

"For low-LVR borrowers, the banks are starting to dish up some nice specials," Stephens said.

Two-year rates had fallen below the floating rate again, and three-year rates weren't far off.

"At those levels, it is a good opportunity to fix," Stephens said.

"However, I'd add the caveat that I don't think that opportunity is going to last long."

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- Fairfax Media

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