Diana Clement: Shedding light on fix or float dilemma

What do you think I should do with my mortgage? It's the type of question I get asked. This time I was walking in Dome Valley with the North Shore Tramping Club.

Huffing and puffing up a hill in driving rain isn't the time to be dwelling on such issues - and mortgage advice is best sought from a mortgage broker.

Had I been in my friend's boots, however, I might have fixed 50 per cent and floated 50 per cent, because she needs interest rate certainty. Someone else might be willing to take the uncertainty of being on a floating rate.

Mortgage brokers, and even economists, for that matter, don't have a crystal ball and can't predict exactly what might happen to rates. The BNZ's chief economist, Tony Alexander, commented recently: "Nothing one can do will prevent one's rate expense for the next three years being above current floating rates."

When mortgage rates hit historic lows following the credit crunch most property owners were thankful. Because paying the mortgage was no longer such a large issue, they stopped fretting as much about whether to fix or not. Some are getting nervous.

"Can you smell the fear?" was the headline in a newsletter I received from mortgage specialist Squirrel. Having said that, newsletter author and mortgage broker John Bolton added he was expecting a sustained period of relatively low interest rates - with some blips and bumps along the way.

"You'd be amazed how many clients ring up all the time in a panic about interest rates."

New Zealand Mortgage Brokers Association president Darren Pratley says because floating rates are low most investors have been taking a wait-and-see approach rather than making active decisions about their mortgages. "It probably has been a very good strategy up until now."

Pratley, who runs Auckland Home Loans, is recommending people take longer-term management of their home loans.

That means assessing where you think interest rates are heading and whether you need a level of certainty.

No one wants to pay more than the minimum interest rate, so mortgage brokers are finding few clients are fixing, unless they need absolute certainty. Even then, they're no longer fixing for five years, as they may have in the past.

Those that do fix are tending to choose six-month or one-year rates, which allow them to review their situation regularly. The maximum mortgage broker Annette Kahn of Roost has seen is three years.

Fixing for short periods exposes home owners to the floating rate more regularly, says Pratley, which might be an issue if that rate rises sharply.

Other issues home owners ought to be thinking about, says Pratley, include:

* Are you still with the right lender?

* Are you still on the best rate option?

Although most property owners aren't giving their mortgages the scrutiny they did three years ago, smart ones are overpaying their mortgages even after they come off high, fixed rates - with the overpayments reducing the principal.

The purpose of paying at this level isn't so much to pay down the mortgage, as it might be in high-interest times - although that's a bonus. It's more to ensure you don't get into the habit of spending the "extra" money and get into difficulty when rates rise again - which inevitably they will, even if it's not this year.

Fixing for three or five years would add significantly to monthly payments. The ANZ's current rates, for example are: simple variable, 5.95 per cent; six months, 6.10 per cent; one year, 6.45 per cent; two years, 7 per cent; three years, 7.3 per cent; and five years, 7.75 per cent.

Taking those rates, on a $300,000 loan, your interest payments per month would be $1923.75 on the simple variable rate, $2178.09 on the two-year rate, and $2413.66 on the five-year rate.

The logic of fixing at these higher rates is banks are predicting rates will rise and that you will end up paying less over time. But not too many mortgage-holders are buying that idea.

They'd rather take the lower rates while they have a chance. We haven't seen rates as low as they have been over the past year for several decades.

Dropping from rates that topped 9 per cent to a floating rate of, say, 6 per cent, leaves a large chunk of money to play with. "If people are carrying extra [consumer] debt we are encouraging them to use that extra repayment to get rid of it," says Pratley. "This puts you in a much better financial position."

In some cases he recommends clients take revolving credit loans to allow them to pay down the loan more rapidly.

Pratley isn't the only mortgage broker suggesting clients pay down capital while they have the opportunity. Bolton recommends clients stick with floating or short-term fixed rates.

"Keep your mortgage rates as low as possible and focus on repaying debt," says Bolton. "Make sure you are repaying your mortgage so that it is paid off in 15 to 18 years."

There are home owners who will simply spend their windfall and a few have taken the opportunity to move to a bigger house. But they are in the minority.

"People realise it is the time to batten down the hatches," says Pratley. Clients have found the recession sobering and most have been "fiscally responsible" and have used the additional funds sensibly rather than treating it as income.

Inevitably some people will be living in cloud cuckoo land and base their budgets, if they have one, on permanently low interest rates.

It's mainly home owners that are doing this, not investors, says Kahn. They tend to stick to paying just the interest.

Many of these investors would have been negatively geared and the drop in interest rates has simply eased their financial position, rather than giving them a cash surplus.

Investors are still buying. Kahn, who specialises in investment mortgages, says she is getting inquiries from property traders as well as regular investors. The minority of traders who can access bank funding are continuing to buy and sell on. The others are faced with huge fees that can be as much as 3 per cent of purchase price and interest rates of up to 12 per cent, which often makes it uneconomic to buy, renovate and flick on.

The bulk of investor mortgages through mainstream lenders, however, are for buy and holds, says Kahn.

Another issue facing investors is that lenders - mostly banks - are playing hardball. First of all they've lowered their loan-to-value ratios (LVRs) on investment properties to as low as 70 per cent.

In one case, reported in another newsletter, an investor cashed up another property just to have the lender take the equity to lower the LVR on other properties. They're also much more likely to look into personal spending before agreeing to lend.

Kahn says it is much more difficult for investors to get interest-only terms and loans over 80 per cent can be loaded with relatively high low-equity premiums.

She cites the example of a 95 per cent loan on a $400,000 investment property. A low-equity premium on that loan might be around $11,000. "Three years ago you would have got it without a premium," she says.

Pratley says he also sees banks differing in their approach. For example, Westpac will lend over 80 per cent for "good, strong customers" - going to 90 per cent in rare instances. And ANZ is more lenient in its approach to serviceability.

You'd think with rates so low that first-home buyers would get a look-in on the property ladder. The banks, however, are being very conservative in their assessments and working out servicing ability based on a 7.5 per cent to 8 per cent interest rate, says Pratley.