Homeowners to get off lightly as loans mature

While Reserve Bank Governor Alan Bollard did not raise interest rates yesterday, his swarm of increases over the past two years will come home to roost for thousands of homeowners whose fixed-rate mortgages come up for renewal this year.

However, they may be getting off lightly, as a ready supply of relatively cheap money and competition among banks has taken some of the sting out of Bollard's punishment.

The BNZ general manager of personal financial services, Blair Vernon, said a "quite staggering" 41 per cent of fixed-rate mortgages were due to mature this year.

Most of those were fixed two years ago, 24 months being the term of preference for many.

Vernon said most homeowners who fixed for two years in 2004 would have fixed at a rate around the 6 per cent or, on average, around 7 per cent. Since early 2004, the Reserve Bank has raised the official cash rate nine times.

"If you're coming back on the market now, you're facing at least a 1 per cent hit in interest. That makes for an interesting challenge in making sure you've accommodated for that."

The four major banks now have two-year rates of 8.15 per cent, apart from the BNZ, which offers 7.99 per cent.

According to banks' online calculators, weekly payments on a $250,000, 25-year mortgage at 7 per cent would be about $407, rising to about $445 at 8 per cent.

If a person gambled on Bollard cutting rates over the next few months and opted for a floating rate, the weekly payment would be about $505 at the present 9.55 per cent offered by the major banks.

But David Chaston, publisher of interest.co.nz, said homeowners refixing their mortgages this year were getting off comparatively lightly.

He said Bollard's nine increases in two years had not affected fixed-mortgage rates as much as he might have hoped.

A 100-basis point increase in the interest rate was "not the sort of pain that Dr Bollard is hoping to impose on people in this market" as he sought to contain inflation by reining in the boisterous housing market.

That was because the wholesale price of money on international interest rate swap markets used to fund fixed-rate mortgages fell recently and because of the intense competition among banks for fixed-rate business.

People have embraced fixed-rate mortgages in recent years, attracted by lower interest and the certainty they provide. Five years ago, 60 per cent of mortgage debt was at fixed rates. Today that is about 80 per cent and Vernon said up to 90 per cent of new business was in fixed-rate offerings.

The estimated $36.5 billion worth of fixed-rate mortgages up for renewal this year "makes for a contestable and competitive market", he said.

"I think that's good for people who've got home loans maturing. They are going to be in a situation where they want to search for the best offer.

"We see the next 12 months as fascinating in the sheer volume of mortgages that are going to mature and the competitive environment."