Home Truths: To fix or float It's time to swot

Photo / Herald on Sunday

The New Zealand home-loan environment over the past six months has resembled a washing machine. Interest rates have been changeable, Reserve Bank commentary has been conservative and economists are constantly questioning the future of interest rate shifts in the local market.

On top of this, the country's retail banks have softened lending criteria, offering borrowers the 90-95 per cent lending limits not seen since the global credit crisis.

More than 60 per cent of all home loans are on variable or floating interest rates - something not seen in a long time. Historically, New Zealanders have preferred a "lock-and-leave" approach to home-loan management, and although this gave lenders certainty regarding their payments, it concerned the Reserve Bank, which could no longer use the official cash rate as a lever to influence the economy away from incurring the effects of exaggerated inflationary pressures .

As a result of market conditions, interest rates are now at a level not seen in more than 47 years.

Those reaching the end of their existing fixed-rate terms are choosing to enjoy extremely low floating interest rates. But sitting on these floating rates is not always easy: regular attention is required to spot just the right time to return to fixed rates, and many consumers don't always have the time or expertise to keep such a close eye on the marketplace.

That close eye is crucial though, as knowing the right time to move to a fixed interest rate is imperative. Fixed rates offer certainty around payments and protect you from interest rate increases. A good tool to help you assess when and how to make this change is the traditional SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis.

The SWOT is a strategic planning tool that allows you to evaluate a decision using a number of set internal and external factors. If your objective is to evaluate the home loan interest rate market and protect your household budget from missed interest rate opportunities, the SWOT could be a useful framework for your decision-making.

Strengths

* The lowest interest rates in 47 years, providing the opportunity to enjoy low repayments or lock in fixed rates at historically low levels.

* A relaxed marketplace, meaning little time pressure, giving you time to investigate options and avoid hasty commitments.

* A low volume of residential property on the market is starting to create buying pressure, especially in Auckland's preferred residential areas. This pressure will of course be monitored by the Reserve Bank and could contribute to the lifting of interest rates.

* As long as you have access to someone in the know, you can work out a strategy that allows you to make the most of low interest rates without getting caught when they began torise.

* New Zealanders are repaying debt for the first time in many years as they take advantage of the low interest rates. By staying on the floating interest rate you can repay amounts of principal off the outstanding balance at any time without incurring early repayment penalties

Weaknesses

* The economy is flat and not looking likely to rise in the short term.

* The Christchurch earthquake has had a dampening effect on the economy, but there is uncertainty about the effects the rebuild will have on inflation.

* Household budgets are being squeezed by rising costs and this is limiting the ability of borrowers to exaggerate their debt reduction. Hence many consumers are keeping their repayments at minimal levels, which is not helping reduce debt levels.

* Although there is competition between lenders for certain types of client, they continue to be particular about required information and proof of circumstances before mortgage approval.

Opportunities

* Customers can lock in now to guarantee repayments for a set period.

* There is a great range of fixed ratesat historically low levels available from lenders.

* Generally, lenders are looking for new clients to grow their stuttering loan books.

* Now is a good time for first-home buyers to look at getting into the market.

* Residential property prices have been impacted by market conditions so there may be opportunities to be found here.

Threats

* Locking in a rate now means you risk missing out on further interest rate decreases.

* There is a chance of a sudden rate spike because of inflationary pressures.

* Stress on the country's self-employed continues, causing further slowing of the economy.

* Household budgets continue to be squeezed by increased living costs.

* Unemployment is increasing because of pressures on businesses, meaning sorting out your household budget's largest item is imperative.

As you can see, there are many factors to think of when considering likely changes in the home-loan marketplace. It is important to have a strategy in place to monitor these changes and manage your debt. A well-considered plan will help you take lifestyle events into account and limit the interest you have to pay. Having a good mortgage broker can help you consider options from a range of lenders and devise a structure that best suits your needs.

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