By Mark Fryer
personal investment editor
Recent months have been kind to borrowers, as mortgage interest rates finally escaped from the double-digit territory where they spent much of the 1980s and 90s.
Only a year ago the average rate for home loans was still above 11 per cent, according to Reserve Bank figures; now some lenders charge less than 6 per cent for floating rate loans.
Lately, however, there have been more signs that the era of steadily-falling rates may be at an end. Earlier this month, for example, lenders BankDirect and WestpacTrust lifted some of their fixed mortgage rates slightly.
Do such signals mean the end of the golden weather for borrowers, or are they just a meaningless blip? More importantly for anyone taking out a new loan or refinancing, how does the choice between floating and variable rates stack up now?
As always, forecasting interest rates makes entrail reading look reliable, especially in a world where the decisions that move rates are as likely to be made in New York as they are in Wellington.
However, most local economists agree that higher rates are, if not imminent, then at least on the horizon.
For example, a Reserve Bank survey released this week found that most of the business sectors polled believed rates would be higher early next year than they are now.
Not high enough to cause many home owners to lose much sleep though; rates on 90-day bills, which floating mortgage rates tend to follow, were expected to be about 0.5 per cent higher next March than they are now.
Much the same forecast could be found in the Budget, which had short-term interest rates staying about where they are for the rest of this year, then climbing. But still hardly soaring; the Budget forecasts expect short-term rates to be about 0.5 per cent higher in 1999-2000, up another 1 per cent the following year and 0.5 per cent the year after that.
Or, as ASB Bank economist Rozanna Wozniak put it in her latest survey of the housing market: "... as we move into the year 2000, the risks for interest rates will increasingly turn upward."
All of which - while hardly a disaster for most borrowers - means that if you have a floating loan it will be worth keeping a close eye on interest rates. If the predictions come true, it could be worth switching to a fixed rate loan.
Fixed loans have been the big news in recent years - accounting for 63 per cent of all mortgages last year, compared with just 7 per cent in 1994 - but in recent months there have been signs of a swing back to floating rates.
The reasons are obvious; while fixed-rate loans were cheaper last year, things have now turned around, to the point where floating loans at 5.75-6.5 per cent are now about 1 per cent cheaper than 3-year fixed loans, which are typically in the 6.9-7.35 per cent range.
The last time floating rates were so attractive relative to fixed rates was in 1994, says the ASB.
Rozanna Wozniak says the new-found popularity of floating rate loans suggests borrowers either believe there is little danger of a rise in rates, or are waiting for the tide to turn before fixing.
Whether that's a good strategy depends on who you ask.
Glyn Slade, of mortgage bankers Cairns Lockie, says that with floating rates so low, he tends to suggest that borrowers choose that option. "We tell them to keep an ear to the ground and if they see signs of it moving, give us a call and fix."
Auckland mortgage broker Eddie Higginson, of Sage Financial Services, takes much the same approach.
While the vast majority of clients like having a split loan - part floating, part fixed - at the moment he's not advising people to choose longer-term fixed rates.
"Every month that goes by they are on the right side," he says.
"Why not take advantage of the low variable rates and if things move then we'll think about it. "You don't have to panic," says Mr Higginson. "We'll know soon enough if there's an upward trend in rates, and if you want to fix it's one phone call ..."
Mortgage Broker Mike Pero isn't so sure. "Our advice is let's split and spread the risk," he says. If you're borrowing $200,000, for example, he might suggest having $170,000 on a fixed rate, with the rest on floating.
Not everyone wants to have to follow interest rates closely and be ready to fix their rate as soon as they show signs of climbing. "A year ago you wouldn't have believed that rates would have come this low - why not fix and just be happy" he asks.
"People are happy to pay a fixed rate of say 7.75 per cent for five years because they know it's not going to move," says Mr Pero. "People still have memories of rates being up at 11 per cent."
Rozanna Wozniak also warns that there is a risk in opting for a floating rate now and hoping to lock in when rates look like rising. The signs may not be that easy to read, especially as far as fixed rates are concerned, unless you're in the habit of monitoring things like overseas bond yields, and she says that if there is suddenly a lot of demand from borrowers wanting to fix, that could in itself push up rates.
For borrowers who aren't comfortable with the risk of a future rise, she suggests, fixing is an option worth considering.
Floating rate loans are low, fixed rates not quite so low. But that doesn't mean there's no contest in mortgages.
• e-mail: mark_fryer@herald.co.nz
