Mortgage interest rates – at well below 6% – are at their lowest levels in 50 years. ASB Bank launched a two-year fixed rate of 5.45% this month, and plenty of competitors are near that. These are eye-wateringly attractive compared with fixed rates of more than 8.5% in 2008, before the global financial crisis. They would appear unbelievable to those who remember 1986-87’s mortgage-rate spike of 20%-plus. For a long time after that period, I would tell people that if they could get mortgage money at less than 10%, they should seize it with both hands. At the moment, floating rates are at a premium (of up to 0.3 percentage points) over a two-year fixed term, which raises the question of which is the best option. The argument for fixed rates, of course, is you won’t face nasty surprises if interest rates rise. But with floating rates, if they go down, you benefit. So, you really have to take a position on what you think interest rates are going to do over the next wee while. Using the handy calculator on the interest.co.nz website, you can see the difference between 5.45% fixed for a year and 5.75% floating on a mortgage of $350,000 is $1100. The calculator uses a range of assumptions and predictions, so the amount is not guaranteed but is a useful guide. Although $1100 is not huge in the overall scheme, it’s certainly worth having.
In New Zealand, about 60% of mortgages are on “floating” terms. Floating rates overtook fixed in popularity a couple of years ago, as interest rates fell to new lows. Over the past few months, however, the trend has been for people to switch back to sexy fixed-rate offers. The historic trend to fix made sense given the volatility mortgage rates have shown over the past two or three generations. Many opted for the certainty of knowing their commitments, at least for the next couple of years. Bank economists remain divided as to the best option. Those with a gloomier outlook say the Reserve Bank, which fixes the base that rates are set on, is unlikely to push off these lows for the next nine months to a year. This is based on the continuing debt horror story in Europe, which is subduing economy activity worldwide and discouraging people from borrowing money. New Zealanders also have a rather large debt hangover to work off, including collectively more than $170 billion in mortgages. Although our public debt is reasonably okay, our private debt is high.
The suggestion that nothing much is going to happen to interest rates over the next year or two makes the rather large assumptions that nothing else particularly nasty will happen in Europe and we won’t have an economic drama somewhere else. Reserve Bank Governor Alan Bollard, in a recent paper on lessons from the global financial crisis, says we should be worried if another global event occurs because we depend on (mostly foreign) bank lending and we have relatively few players. Our economy is far from thriving. Unemployment remains stubbornly high, credit-card spending is subdued and so is tourism. The effects of the Christchurch earthquake continue to be a heavy burden. But not all is gloomy. Our economy is in much better shape than most. We should have quite low inflation for some time, and once Christchurch’s rebuilding starts to gather momentum – some time soon, please! – unemployment should begin to ease from the flow-on effects. Thankfully our major exports, especially dairy products, have held up well and company profits are okay. So, whether to fix or float is really a question of your appetite for risk, and what you think interest rates are likely to do. Of course, you can always have a bet each way, and put some of your mortgage on fixed and some on floating