What home loan borrowers are doing - have they made the right call?

By Susan Edmunds of RNZ

A 4.99% two-year rate has been enough to pull New Zealanders back from a strategy of short-term home loan fixes, the country’s largest mortgage advisory firm says.

Data released from the Reserve Bank this week showed that in January, 89.5% of new owner-occupier loans were floating or fixed for less than a year.

But Squirrel chief executive David Cunningham said that had since changed dramatically.

“It’s a point in time thing. We saw in November there was a massive amount of money going into floating and six-month fixes because there was the OCR reduction, which was widely expected.

“People held off. That was the right move... then we saw that mostly unwind in December but as we approached the next OCR review, we had the same effect happening.”

He said now that the two big forecast OCR cuts had happened, and there were attractive rates on offer, more people were fixing for longer.

“The 4.99% rate has been an absolute game-changer.

“Everyone has gone from short terms to the traditional two-year which New Zealanders have loved for decades.

“We’re seeing almost no money going floating and a very low level into six-month fixes because those rates are materially higher.”

While the big banks are offering 4.99% for two years, at six months they are advertising either 5.79% or 5.89%.

Cunningham said most people were choosing to split their home loans into one-year and two-year terms, or two-year and three-year.

“But 60% or 70% of actual dollars is going into two years. We have seen a profound change.”

He said 4.99% was not likely to be far from the lowest point in this cycle, unless there was another recession.

“If the neutral cash rate is 3% according to the Reserve Bank, it probably implies 4.75% is as good as it gets in the near term.”

ASB senior economist Chris Tennent-Brown said economic forecasts, marketing strategies and the number borrowers had in mind had converged on 4.99% being the rate at which borrowers “got off their perch” and made a commitment.

He said there was a risk that longer-term rates could increase from where they were now.

“They’re still a long, long way off their highs but they have moved up. At times, the upward pressure on those rates has been quite large.

“Markets are so volatile at the moment that if we purely look at what swap rates are doing relative to mortgage rates, that upward pressure isn’t as great as at times it has been. That’s this week, when the global market is worried about recessions.

“If they worry about inflation like they did a month ago, the pressure could be back on longer-term rates.”

Tennent-Brown said it had been his view for a while that there was no point in floating or fixing for six months at the more expensive rates, when borrowers could access other fixes close to 5%.

“People really need to think the actual thing they should be trying to do is minimise the interest rate cost over the life of the mortgage, not pick the bottom.

“There’s no point getting the lowest rate that occurs this cycle if you’re paying through the nose to get it.”

-RNZ