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Are long-term rates the best bet?

Mortgage borrowers need to start hedging against the risk that interest rates will rise and move in "unpredictable" ways, according to economist Tony Alexander.

Friday, March 19th 2021, 9:23AM

The seasoned economist believes it is time for borrowers to stop trying "to get the lowest possible interest rate cost and start hedging against the risk that rates move in unpredictable ways in coming years".

It comes as global bond yields rise, and interest rates increase, as financial markets expect strong economic growth. 

Alexander favours locking in longer-term rates and securing low interest on five-year terms.

"Strong protection for a homeowner can come by fixing everything at five years. But that creates a rate reset risk in five years time. Personally, if it were my mortgage, I’d probably accept that risk and focus on getting the principal down as much as possible in the next half-decade."

He said a mix of five-year fixed rate funding and shorter terms is "probably best" for most people. 

While many borrowers are holding off fixing longer terms, Alexander warns rates will rise more quickly than expected.

"Fixed rates rise in advance of floating rates as a rule. This is because they reflect expectations of future monetary policy stretching over a number of years and not just where the central bank’s overnight cash rate is now and where it will be in three to six months."

He said it would be near impossible for homeowners to second-guess the Reserve Bank.

"So, when considering how to manage your interest rate risk don’t think only in terms of minimising cost. Think also about the low predictability of rate movements and the need to spread your exposure to rate changes down the track which might not come when people expect."

Alexander's comments follow recent opinions from ASB, which also suggested long-term rates were a good bet in the current market.

HSBC offers the lowest five-year rate at 2.89%, while banks including BNZ, ASB, SBS, TSB and Westpac have 2.99% five-year terms.

Tags: fixed rate mortgages interest rates Lending Tony Alexander

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AIA 4.55 2.55 2.95 3.29
ANZ 4.44 3.10 3.50 3.84
ANZ Blueprint to Build 1.68 - - -
ANZ Special - 2.50 2.90 3.24
ASB Back My Build 1.79 - - -
ASB Bank 4.45 2.55 2.95 3.29
Basecorp Finance 5.49 - - -
Bluestone 3.49 3.34 2.99 3.34
BNZ - Classic - 2.55 2.95 3.25
BNZ - Mortgage One 5.15 - - -
BNZ - Rapid Repay 4.60 - - -
Lender Flt 1yr 2yr 3yr
BNZ - Std, FlyBuys 4.55 3.15 3.22 3.85
BNZ - TotalMoney 4.55 - - -
CFML Loans 4.95 - - -
China Construction Bank 4.49 4.70 4.80 4.95
China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.95 - - -
Credit Union Baywide 5.65 3.95 3.85 -
Credit Union South 5.65 3.95 3.85 -
First Credit Union Special 5.85 2.95 3.45 -
Heartland Bank - Online 1.95 1.85 2.35 2.45
Heretaunga Building Society 4.99 3.80 3.90 -
Lender Flt 1yr 2yr 3yr
HSBC Premier 4.49 2.19 2.45 2.69
HSBC Premier LVR > 80% - - - -
HSBC Special - 2.25 - -
ICBC 3.69 ▲2.29 ▲2.69 ▲2.99
Kainga Ora 4.43 2.67 2.97 3.13
Kainga Ora - First Home Buyer Special - 2.25 - -
Kiwibank 3.75 3.34 3.34 4.14
Kiwibank - Offset 3.75 - - -
Kiwibank Special 3.75 2.49 2.49 3.29
Liberty 5.69 - - -
Nelson Building Society 4.95 2.99 3.24 -
Lender Flt 1yr 2yr 3yr
Pepper Essential 4.79 - - -
Resimac 3.39 2.98 2.79 3.29
SBS Bank 4.54 2.69 2.99 3.29
SBS Bank Special - 2.19 2.49 2.79
Select Home Loans 3.49 3.34 2.99 3.34
The Co-operative Bank - First Home Special - 2.29 - -
The Co-operative Bank - Owner Occ 4.40 2.49 2.89 3.19
The Co-operative Bank - Standard 4.40 2.99 3.39 3.69
TSB Bank 5.34 3.30 3.69 4.04
TSB Special 4.54 2.50 2.89 3.24
Wairarapa Building Society 4.99 3.55 3.49 -
Lender Flt 1yr 2yr 3yr
Westpac 4.59 3.15 3.49 3.89
Westpac - Offset 4.59 - - -
Westpac Special - 2.55 2.89 3.29
Median 4.54 2.68 2.99 3.29

Last updated: 29 July 2021 9:04am

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