The lure of attractive fixed home loan rates
Lenders are trying to entice borrowers away from floating rates with attractive fixed home loan rates, but will it work? Jenny Ruth investigates.
Friday, November 11th 2011, 12:03PM 
3 Comments
by Jenny Ruth
A number of banks have been vying to offer the sharpest two-year fixed mortgage rate over the last couple of weeks.
TSB Bank, Westpac, Kiwibank and HSBC have all tossed some very low rates into the market with SBS Bank currently offering the lowest with its 5.65% special - that's exactly the same as its floating rate.
Other banks' two-year rates aren't that far from their two-year rates: TSB's 5.88% two-year rate is only nine basis points above its 5.79% floating rate.
Craig Ebert at Bank of New Zealand says would-be borrowers can thank the Italian crisis for this because wholesale prices have been dropping steadily since July when the wider European crisis began worsening.
The two-year swap rate, which banks use when pricing their two-year fixed mortgage rates, is "the lowest it's been since reasonable records began," Ebert says.
At below 3%, the two-year swap rate is even lower than it was in the depths of the global financial crisis - back in January and February 2009, it was about 3.25%. In July, the rate was about 3.7% and by the end of October it was 3.2%.
"In theory, that should stimulate demand for funds," Ebert says. "But no one's really wanting to borrow at the moment."
The two-year mortgage offerings are flying in the face of the strong trend for borrowers to move to floating rates. Reserve Bank figures show how dramatic this shift has been.
Back in mid-2007, two-year fixed mortgages were the most popular by far. Mortgages with more than one and up to two years to go accounted for nearly 30% of all mortgages. At the end of September this year, they accounted for just 12.2% of all mortgages.
Floating rate mortgages accounted for just 12.4% of all mortgages back in August 2007. By March this year, they accounted for more than half and by September they accounted for 57.6%.
Nick Tuffley at ASB Bank says it's a little too early to tell whether these low two-year rates will halt the trend towards floating rates.
"I suspect the proportion of floating rate mortgages is likely to steadily rise over the next few months but it may slow down a little because of how close those fixed rates are to floating," Tuffley says.
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Comments from our readers
When you fix a rate, the only time you pay a break fee is if the interest rate that you are on is higher than the current rate that you will be dropping too.
e.g. you fix today for 2 years for 6%. In 12 months you want to break. If at that time the 12 month rate is lower than 6% you will be charged the difference that the bank will lose. Conversely if the 12 month rate is higher than 6%, there will not be a break fee charged. You can fix strategically to buy time and in the future if the rates appear to be on the verge of rising you can quickly break with no penalty and refix again for another medium term. So if you fixed 2yrs at 6% today and say got 6.25% about 2 years down the track you may get an average of about 6.15% over a total of 4 years, which is far better than a 4 year rate today!
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How long have banks been recording their advertised interest rates, and can someone please explain what a "reasonable record" is, and when banks began recording these records?