Mortgage-holders face rising interest rates for first time in six years

People with home-loans are facing rising mortgage rates for the first time in six years. Photo/Greg Bowker.

Some mortgage holders are breaking their fixed terms early to lock in longer term rates before they rise further, says a broker.

Bank rates for three, four and five year fixed term mortgages have risen in recent weeks reflecting higher borrowing costs for banks in the international money market.

Banks are having to borrow more money on the international market to fund their lending because of a slow-down in retail deposit growth.

Bruce Patten, a mortgage broker with Loan Market in Auckland, said rising rates had resulted in some people taking action now.

"We are getting a lot of people that are now starting to look at breaking early to get onto a lower rate."

Patten said people wanting to get certainty on how much they would be paying for their mortgage for the next few years should consider fixing for three years while he said investors should look at three-to-five-year terms.

He predicted New Zealand could end up with a two-tier market where shorter term rates - those fixed for two years or less - would stay low and longer term rates would move higher.

"Banks haven't moved short term rates."

He said they were not likely to increase them as long as the official cash rate stayed down.

"Three, four and five year rates tend to be funded off-shore and that cost has gone up."

Patten said it had been nearly six years since Kiwis had seen any major shifts in mortgage rates going up.

Rates began to go up in mid-2010 before the Christchurch earthquakes hit in November 2010 and February 2011.

Since then they have dropped markedly with some banks dropping their fixed terms as low as 3.99 per cent earlier this year.

"People have got used to paying around 4.5 per cent," he said.

The long period of falling mortgage rates means some property owners will have yet to experience a rising interest-rate environment.

Patten said first home buyers typically were not the worst affected by rate rises with young couples often able to get in a flatmate or make other adjustments to cope with the added cost.

"It's mum and dad investors with one and two investment properties that get hit the most," he said.

Patten said mortgage rate rises would likely lead to rent rises as investors passed on higher costs.

Higher interest costs would also restrict how much people could borrow.

"At the moment it hasn't had an impact but it will going forward," he said.