Switch decision could put floaters in a fix

Floating rate borrowers are enjoying the lowest average rates since July 1965, but those waiting for signs fixed rates will rise before switching may be taking a risk, according to BNZ.

Friday, April 29th 2011, 12:00AM

by The Landlord

In its latest Real Estate Overview BNZ said that some risk is attached to borrowers wait and see approach.

"We believe a substantial number of borrowers are sitting floating waiting until it is apparent fixed interest rates are going to rise and when they believe that point has been reached they will switch to a fixed rate," the report said.

"However, when banks lend at a fixed rate they borrow at a fixed rate as well and over short periods of time it is not possible for banks to switch substantial borrowings from floating to fixed."

"What that means is that when the point is reached at which borrowers decide to switch into fixing the fixed interest rates will jump sharply higher almost immediately as banks seek to preserve margins. Therefore, borrowers need to be aware that although borrowing at a floating rate is currently cheap the floating strategy does entail some risk if one plans to fix."

The report said that at the end of February, almost 50% of all mortgage volume was sitting at a floating interest rate - the highest proportion since the official data series started in 1998 and far higher than the 13% just three years ago.

While forecasting upward movement in interest rates, predicting a 2.5% rise in rates over 2012, the bank cautions "there is considerable uncertainty regarding rate rises and at this stage it is not possible to forecast when the peak in interest rates will occur or at what level."

In the report BNZ examines a number of factors that influence the property market, including turnover, prices, consumer confidence and migration, concluding "we believe we are at the start of a cyclical upturn in the housing market with Auckland leading the way due to a greater shortage of properties compared with population size than other parts of the country."

"When one throws in the effect of an aging population reducing average occupancy per house, an improving labour market bringing first home buyers back into the market, and rising construction costs, it is easy to see that upward pressure on prices will escalate."

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