Bernard Hickey: 10-year loan fast eclipsed

TSB is offering 10-year rates, but is it the right time for Aucklanders to make such a commitment? Photo / Doug Sherring

Like any successful politician, Prime Minister John Key knows a week is a long time in politics.

He is a master of not overcommitting to a public stance or taking long-term public support for granted and displays a Muhammad Ali-esque ability to dance around the ring to avoid a knockout blow.

A week is not long in the world of mortgages and interest rates either, and these days a lot can change in a month or two.

Before Christmas the Reserve Bank was forecasting higher interest rates by the end of this year and most people thought a recovering global economy would push up inflation and interest rates.

Fast forward to late February and everything has changed. Eighteen central banks have cut interest rates. All New Zealand's major trading partners have eased monetary policy or set interest rates near 0 per cent for years. The Reserve Bank has said the official cash rate is on hold for the foreseeable future.

The scale of the cheap and easy money pulsing around the globe is mind-blowing. Central banks in Sweden, Denmark, Switzerland and the European Union have cut deposit rates to below 0 per cent.

In the past month our two largest trading partners, China and Australia, have eased monetary policy and are expected to cut interest rates further.

Yet New Zealanders, and their Prime Minister, are apparently unshakeable in their belief that interest rates can't fall much lower and that any rate with a five in front of it is a great deal.

That was clear in the euphoria that greeted TSB's announcement of a 10-year mortgage for the apparently astonishing rate of 5.89 per cent. Surely, people thought, that rate will never be repeated.

Key reflected the nation's celebratory mood in a television interview with the comment that it was a "good thing" and would give borrowers a lot of confidence.

Yet since TSB's announcement, fixed mortgage rates have fallen further. HSBC set the same 5.29 per cent rate for every mortgage from one to five years. The average two-year mortgage rate has dropped from more than 6 per cent to under 5.4 per cent since October.

So it's worth challenging the national assumption that fixing for as long as humanly possible with a rate with a five in front of it is a good idea. The average two-year mortgage rate in New Zealand over the past 10 years is 7.2 per cent and just six years ago it was well over 9 per cent.

But what if the new normal is something much lower?

The disconnect between New Zealanders' perceptions about "normal" mortgage rates and the rest of the world is cavernous.

In Britain, banks offer initial two-year fixed mortgages at 1.2 per cent.

One Danish bank toyed with the idea of offering mortgages with a negative interest rate this month. That means the bank pays the borrower.

So why are New Zealanders so sure mortgage rates won't fall?

In late 2008 many Kiwis leapt at the chance to borrow for five years at less than 8 per cent. Within a year, many were paying huge break fees. Imagine the fees on a 10-year mortgage if rates fell to European levels.

Key wouldn't dream of committing himself to a policy stance for 10 years, yet was comfortable suggesting borrowers commit to a 10-year mortgage.

TSB even boasted of Key's support on Facebook.

The mortgage times they are a changin' and borrowers should be as light on their feet as Key is with his policy stances.