The turning point has come – start fixing

Now is the time to hop from floating to short-term fixed mortgage rates, according to BNZ economist Tony Alexander.    

Tuesday, May 18th 2010, 4:15PM

by Jenha White

Commentary from economists all year has suggested that for those on floating mortgage rates  a point would come around May to June when one should hop out of the floating rate just before it started rising to take a short-term fixed rate of one or two years.

"That point, has been reached," says Alexander.

In the BNZ Weekly Overview he says the situation suggests that a borrower such as himself should consider escaping some of the expected rise in floating mortgage rates coming up by fixing two years, given the new scare in the credit markets and the good New Zealand data released recently suggesting the Reserve Bank starts tightening come June 10.

"Based on our forecasts I would do better over the next two years and three years fixing than floating. However, cash flows are important to people at the moment and lifting one's mortgage rate voluntarily by over 2% (to fix three years at 7.75%) is a big call.

"So most people, including myself, will probably feel better fixing two years rather than three years."

However, Alexander also asks: what if the Reserve Bank does not raise rates at the steady pace BNZ is projecting given the global risks still in play and the risk New Zealand is now structurally more sensitive to interest rates than in the past?

"Whereas since the September quarter last year I have been outright in favour of sitting floating, now I would practically toss a coin between floating and fixing two years. You might do the same."

He also says it is important to note that the opportunity to hedge yourself against this rising part of the interest rate cycle came and went in March into April last year.

Alexander says that since then there has been no way anyone contemplating a mortgage over the next few years would be able to avoid at some point paying a relatively high mortgage rate.

For about a year now borrowers have been able to take the lowest floating mortgage rates in four decades and work away at getting the principal down ready for when rates start rising.

"Now we are close to floating rates rising and it is a matter of personal choice whether one now fixes for a short to medium term or floats.

"Either way the cost is going to be roughly the same and the extent of exposure to the likely peak in rates over 2012-13 the same as well."

To read about the three factors influencing the increase in short-term mortgage rates click here.

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