Reports that house sales, prices and bank rates are rising will have buyers wondering how to finance a purchase. Business editor Dene Mackenzie looks at some options.
The mortgage market landscape has been steadily steepening since March.
Long-term mortgage rates have climbed, risk aversion has died away and expectations of a global recovery have firmed.
But short-term fixed rates will lift in the next six months, with the likelihood of the Reserve Bank increasing the official cash rate in the next 12.
Last month, the central bank said it would keep the OCR unchanged until the second half of 2010.
However, the risk is for an earlier lift in rates.
In recent weeks, the New Zealand economic environment was looking healthier and inflation pressures were less likely to weaken as much as first thought, ASB chief economist Nick Tuffley said.
In particular, house prices were starting to lift sharply, due to a dearth of listings.
"The challenge for borrowers is that wholesale rates, and hence mortgage rates, are already factoring in a substantial increase in interest rates over the next year. That means the potential cost savings from fixing have steadily been eroded over time."
Given the little likely cost advantage between floating and fixed terms, preference would be more dependent on factors such as desire for certainty over flexibility, he said.
The one and two-year fixed rates still provided some certainty, though there was no likely cost advantage between six months' fixing or floating.
The fixed rates provided some protection should the Reserve Bank lift interest rates even earlier than was generally expected, Mr Tuffley said.
Floating would probably pay off if New Zealand's economic recovery was patchier than expected.
"We see very little benefit in fixing beyond a two-year term. Yes, those rates provide certainty, but at a very high cost.
"Each borrower's situation is unique, so it comes down to the individual weighing up their own requirements."
Mr Tuffley expected the Reserve Bank to lift the OCR from April 2010, initially in 0.5% amounts until the OCR was back to 4% from the present 2.5%.
The central bank was then expected to move the OCR in 0.25% amounts.
One other strategy for the Reserve Bank would be to start slightly earlier but to move more conservatively.
Either way, it would still take a year or more until the OCR got back to a more neutral level, he said.
Wholesale rates implied the OCR would reach 4.75% by the end of next year and up to 5.5% about mid-2011.
"Consequently, it is now a tough call whether remaining floating, or opting for the shorter fixed terms, will give the lowest cost of funds over the next two years," Mr Tuffley said.
Borrowers should also take into account that in the future, interest rates would be higher than they had been in the past year.
It was important for borrowers to leave a buffer in their finances so they could meet higher debt-servicing costs in the future.
Fixed-term rates had averaged between 7.5% and 8% in the past, but had also exceeded 9% for long enough to cause pain.
Mortgage rates of about 6% were rare, he said.
"One thing borrowers can be certain about is that future interest rates will continue to average higher than the cheap rates still currently available," Mr Tuffley said.
• The options
ONE-YEAR FIXED:
- Advantage: A very low mortgage rate by historical standards and beaten at present only by the floating and six-month terms.
- Disadvantage: Should the Reserve Bank lift rates in the first half of next year, then rates available in a year's time will be substantially higher than those now on offer. The one-year term provides less of a hedge than the two-year rate against sharp lifts in interest rates.
TWO-YEAR FIXED:
- Advantages: Greater certainty than that available through shorter terms; potentially at no or only moderate cost, a hedge against an earlier or more aggressive lift in interest rates relative to current market pricing.
- Disadvantages: Foregone savings if the Reserve Bank started hiking rates later that expected.
THREE-YEAR FIXED:
- Advantage: Providing interest rate surety for longer, including some insulation against an aggressive lift in interest rates in the next few years.
- Disadvantage: The present rate is slightly above its 10-year average and higher than the long-run average for the shorter terms, so provides no clear-cut savings.
FIVE-YEAR FIXED:
- Advantage: The rate offers certainty for a much longer period than the shorter-term fixed rates.
- Disadvantages: The present rate is 0.75% higher than it has averaged in the past 10 years, so other terms are more likely to provide a lower cost of funds in the next five years.
