Deciding between floating and fixed mortgage rates currently may be a case of tossing a coin in some instances, according to BNZ chief economist Tony Alexander.
In this week’s BNZ Weekly Overview Alexander says it is forecasting that the Official Cash Rate will increase from 2.5% now to 5.75% late in 2011 and onto potentially to 6.25% by late 2012.
As a result, these rises imply that floating rates will increase from 5.85% to 9% and then 9.5%.
“If you think we are right then you toss a coin between floating and fixing. If you think we are over-estimating the rise in interest rates then you float,” he says.
Being “generally risk averse” Alexander says he would fix for at least 18 months.
But with cash currently king, a 40-year low floating mortgage rate can provide good cash flow in the current environment, leaving borrowers able to choose what they use that cash flow for, be it other areas of spending, building up precautionary savings or paying down mortgage principal.
“Therefore if your horizon is three years or more there is nothing wrong with floating at 5.85% - especially if one intends having some spare cash on call along the way which can be used to offset the mortgage and effectively earn 5.85% tax-free.
