To fix or not to fix?
Where are mortgage interest rates are heading this year? Good Returns canvasses some expert opinion.
Tuesday, June 1st 1999, 12:00AM
by Paul McBeth
Where mortgage interest rates are heading this year? That is the question we have put to two experts.
First, a quick rundown on the market. Mortgage rates are now subject to two key influences:
- Floating rates are affected by the Official Cash Rate or OCR, which has stayed at 4.5% since mid March. Floating mortgage rates haven't changed since then either, with bank rates remaining at an average 6.5%.
- Fixed rates (mostly for three and five years) are more influenced by moves in the US bond market, which in turn cause rate changes in New Zealand long term bonds. These rates have been going up in recent weeks.
Aside from that, floating rates are currently very attractive relative to the longer term fixed rates (the last time fixed rates were higher than floating was in late 1994, and it was only briefly).
So, what's the outlook?
Stuart Marshall, economist for Bancorp
On floating rates: stable until later this year
"It's my opinion that there's no need for the Official Cash Rate to be changed until November. That's based on the assumption that nothing startling happens in the economy and with the currency."
On fixed rates:
"A very definite upwards bias. The New Zealand ten year bonds have moved from 5.8 % to 6.3%, and there's probably easily another 60 basis points (0.6 percentage points) increase there by the end of the year.
Which would you choose?
The gap between floating and fixed will become wider. But if you fix for the next three years, is the floating rate going to average higher in that time? My own loan is up for review soon and I'll probably put 3/4 on two or four years fixed and the rest floating.
Tony Alexander, chief economist for Bank of New Zealand
On floating rates:
"They're extremely unlikely to increase until much later this year or even the March quarter next year." He's not expecting major moves then either, as he says the Reserve Bank will be cautious with the OCR.
"The OCR will put a lot more attention on monetary policy as now the Reserve Bank has to make and maintain a position. Last year, it made some major mistakes and kept things too tight for too long."
On fixed rates:
" Up 0.5% over the rest of the year, because of the US influence. We're certainly off the cyclical lows in fixed rates, which were about a month ago."
Which would you choose?
"I like the three year fixed rate. That gets you beyond the next peak (in rates), which is expected about two years out from now, and it's only a small premium above the floating rate. But you might keep some on floating in case you come into money and want to repay early."