Is fixing your mortgage outdated thinking?
For more than a decade, being on fixed-rate mortgages was the norm and it seems we still regard fixing as normal. But is it? Jenny Ruth investigates.
Wednesday, August 24th 2011, 10:05PM 
7 Comments
by Jenny Ruth
That's despite 56% of mortgages being at floating rates at the end of June - back in June 2007, only 12.8% of mortgages were at floating rates.
Less than a month ago, many were convinced then was the time to move away from floating rates back into the fixed norm. Most economists were convinced Reserve Bank governor Alan Bollard would start raising his official cash rate (OCR), currently 2.5%, on September 15.
But then the US debt ceiling crisis hit and the European debt problems continue to fester, changing the mainstream view back to thinking it's best to stay on floating rates a while longer. The consensus among economists now is the first OCR hike is likely to be in December.
But is our belief that fixed-rate mortgages are "normal" outdated thinking?
It depends which economist one talks to. Dominick Stephens, chief economist at Westpac, says he's been recommending for some time now that moving one's mortgage to a three-year fixed rate "may well result in a lower overall interest bill than staying floating."
One reason this might be so is bank margins are higher on floating mortgages than on fixed-rate ones, Stephens says.
However, given the turmoil in global financial markets, "now isn't really tactically the time to fix your mortgage. You would be much better off to wait and see what happens to global financial markets."
Craig Ebert at Bank of New Zealand says it largely depends on your view of the future OCR path that determines whether it's a good idea to fix or not.
Most banks' two-year fixed rates are currently well north of 6% and roughly 75 basis points higher than their floating rates.
Ebert says, assuming their isn't a global recession, the New Zealand economy looks set for growth and inflation pressures are already high so today's two-year rates may look exceptionally cheap in a year's time.
"Even though you think you're paying a premium, it might be very cheap insurance to lock it in."
Darren Gibbs at Deutsche Bank has a polar opposite view. While some of the other economists are forecasting the OCR will go back to 5% or 6% reasonably soon, "I don't think we're going to see a seriously high cash rate any time soon, so I don't see any need to sump into fixing," Gibbs says.
Sydney-based HSBC economist Paul Bloxham says about 90% of Australian mortgages are at floating rates. "Will you (New Zealand change back to the way things used to be? I suspect you're going to stay the way you are for a while."
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Comments from our readers
Yes, less profit but never red figures. What does this mean? It means that regardless of the outcome the banks are always the winners.
Second, floating is by any means been the best bet for now almost 4 years.
Third, the reality is that fixed rate really means that the bank has stability in their purchasing outlook on the wholesale market - and that is what the bank likes. Also they like to bind clients into their system as its all about market shares - and as we know the competition is brutal out there amongst the banks.
Forth, who knows what is happening in the US and Europe - nobody!! So what is the client doing in such a situation - take the cheapest deal, because that is what the banks are doing as well on the wholesale market side - why - because the name of the game at present is cost saving where ever possible - this is what we clients should do as well !!
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