KEY POINTS:
Many of us in the run-up to Christmas have paid a visit to our mortgage broker or personal banker to rene-gotiate our mortgages.
It's been a deflating experience; interest rates are higher by 1 to 2 per cent, and for many of us, we'd have preferred to go to the dentist. We had to come to grips with interest rates; figure out how the interest rate increases would affect our monthly payments; decide which bank to go with; and as hopes have been dashed that interest rates will go down any time soon, we have had to think hard about splitting the mortgage into short-term and longer-term periods to hedge our bets.
Why do we put ourselves through this every few years? A new report from Australia's Deakin University has found that people have a greater sense of well-being if they have a mortgage rather than rent their home. "A bond is formed between partners when they share a mortgage, giving them greater certainty in their relationship," said the research.
New Zealanders have never needed much persuading when it comes to taking on a mortgage. Property ownership is drummed into us from an early age, and the $120 billion New Zealand mortgage market is testimony to this. Around a third of this market has been rearranged this year.
By the banks' calculations, it was a historical high, explained by the aggressive mortgage campaign launched a couple of years ago by BNZ and in many cases matched by the main banks, which made a two-year fixed term loan far more preferable than a variable rate.
Until then, it was fairly common for people to have the bulk of their mortgages on a variable rate, says Vernon Blair, Bank of New Zealand's general manager of personal financial services. Fixed rates are vastly cheaper than floating rates; BNZ fixed rates are 7.95 per cent for a two-year loan and 9.55 per cent for floating rates. "That's 150 or 160 basis points difference between floating and a two to three-year term. A five-year mortgage is different by 175 to 180 basis points," says Vernon. Most house loans are now secured on fixed rates, he adds.
Given the current economic environment, many are splitting their mortgages across a couple of fixed terms and are keeping a small amount floating. "Those taking two-year terms are hoping that they will ride the market and pick up a better rate at expiry," says Geoff Bawden, chairman of the NZ Mortgage Brokers Association.
"Most people are facing at least a 1 per cent rise in the interest rates," says Bawden. The new rates for those taking a two-year fixed term, for the average mortgage of $200,000, is going to mean an extra $40 a week. Bawden doesn't expect people to lose sleep over this.
"I have not seen very much evidence of it putting people in a financially difficult position," he says.
The reason people are refixing this time round is the likely prospect of the Reserve Bank increasing wholesale interest rates to try to put the brakes on consumer expenditure and on a housing market which simply will not subside. "I have got to say if the Reserve Bank does not put them up in January, there's a serious problem. Interest rates should have been going up sooner. I'm stunned that they have not," says Kieran Trass, director of Hybrid Mortgages, a mortgage broker and property investment adviser. He predicts that the Reserve Bank will have to take an aggressive stance and that rates might well go up 1 per cent over the year in a series of four base point rises.
"He will have nine opportunities to increase interest rates. If it goes up 1 per cent, we'll be lucky," says Trass.
With this in mind, most mortgage brokers and banks are recommending putting the majority of the mortgage on a two or three-year loan, or somewhere in between, but certainly not on a one-year term, which had been mooted earlier in the year. Some are even advising security conscious home owners to commit to a five-year term, a deal being marketed quite heavily by ASB.
One Auckland home owner describes why he put 90 per cent of his mortgage on a three-year fixed term, with 10 per cent on an a floating orbit loan through ASB. "I did not see rates going down in the next year. Interest rates in North America seem to be going up as well, and that's what determines fixed rates here. A five-year term seems an unnecessary period of time," he says.
As for splitting his $400,000 mortgage between a number of fixed terms, he says: "That's just hedging. I'm not interested in all of that complication." With his fixed-year mortgage, he is still able to make one-off large lump-sum payments of $10,000 minimum, and he will use this facility.
Trass advises his property investor clients that it is worthwhile hedging and spreading the risk. If they have a portfolio of properties, they have more to lose. If they have a $400,000 mortgage, for instance, they should put $100,000 on a one-year mortgage, $100,000 on a two-year, $100,000 on a three-year and $100,000 on a five-year mortgage. This way you end up paying an average of around 7.5 per cent per annum, he says. "I am an advocate of the concept of interest rate averaging.
"What you don't want is to have a large amount coming off at the time," says Trass.
For people who just own one home, Trass says he would encourage them to take three to five-year terms. Rates are relatively low, historically, even if they have gone up 1 or 2 per cent over the last two years, he says. Five-year fixed rates are currently between 7.75 per cent and 7.9 per cent. "The best thing you can do is give yourself some certainty, fix for five years and forget about it.
"There are more important things to worry about," says the property broker.
For many households, there is still a strong argument for keeping 10 or 20 per cent of the mortgage on a variable rate to ride a downswing of interest rates.
Westpac's senior product manager of housing, Mike Davy says a favourite term among the bank's customers is a period between two years and three years, say 30 months. The bank's economists are saying that an 18-month term is the best balance in today's climate.
Westpac, which has been accused of hanging back too long in entering the mortgage wars, has deliberately not advertised the five-year rate as a great option for customers, mainly because you don't know when the interest rates will start to drop, says Davy. Most of Westpac's rollovers happened in May/June this year, while the other banks saw the bulk of their rollovers in October, November, December, says Davy.
The banks, unlikely to tell of any loss of business, are predictably upbeat about their busy year. As well as mortgage renewals, new customers were continuing to sign up, as people continued to enter the property market, says ASB marketing manager, Jonathan Symons.
"There has been a surge in business. We think that the Auckland market may have been particularly strong in the last few months. Auckland has done a lot of business. We have had a very good November and we're expecting a strong December month," says Symons. "There have been a huge amount of two-year loans rolling over, and they have spread more into longer terms, like the five-year one. They might split the fixed term between five years and two years."
ANZ National bank is said to have benefited more than most as some mortgage business has been redistributed.
Bank spokesman, Craig Howie says that ANZ's Spring campaign which started in September had worked well.
"ANZ has gained market share. It has been noticeable. It has been a focus on customer retention," says Howie.
With the banks continuing to run aggressive mortgage campaigns, BNZ's Blair Vernon, says these years when vast amounts of mortgages are renewed will continue. "It's going to happen again next year," he says.
BNZ's average mortgage term is two-and-a-half years, though Vernon says there is an increasing interest in the three-year period.
"Newer home buyers 35 and under tend to think that a 7 per cent interest rate is all good, but as soon as it gets to 8 per cent, they feel it is relatively expensive," says Vernon. "They can't even imagine what double digit interest rates are like, unlike those in the 35-plus group."
BNZ has done well with its Flybuys home loan, says Vernon. If you commit over $150,000 to the loan, you will pick up 1008 Flybuys points a year.
"It has been very popular and is a fixed three-year rate with that very sharp price of 7.95 per cent," says Vernon.
Non-bank lenders have won some business from the banks this year.
Bluestone, a non-bank lender, has made its name with low-doc loans. Low-doc loans are particularly attractive to the self-employed because mortgagees are not required to provide as much financial information as they would for normal mortgages.
Bluestone has been one of the chief beneficiaries of this second-tier business and has had a good rate of mortgage renewal this year according to the mortgage brokers. But it is seeing some new competition from the bigger banks, who are now venturing into areas which they wouldn't have touched with a barge pole before. Westpac launched a low-doc business in October this year.
"It is a very competitive time in the market place amongst the main banks," adds ASB's Symons.
In some cases, banks are offering very competitive rates for a low-doc borrower, but Bluestone General Manager NZ Terry Zouch doesn't think it is sustainable. "I don't think the banks are pricing it right," says Zouch, previously with ASB. The banks will continue to fight it out, and if you have the energy, you can still hammer out a good deal for your mortgage that, you can comfort yourself, would look like a bargain ten years ago.
- HERALD ON SUNDAY
