Types of mortgage plans

Last week we discussed the various types of mortgage plans generally available to New Zealand borrowers.
What was not considered in that piece was the current interest rates and the outlook ahead, save for a brief comment on how to begin planning to fix the rate or not.

With our economy slipping toward a softer time and many, many folk rolling off the end of very competitive 24 month fixed rates, from the mortgage price war of Christmas 2004, what are we likely to see?

The Reserve Bank of New Zealand (RBA) left the official cash rate at 7.25% last time, but lenders are continuing to cut fixed rates to keep market share, and we are likely to be near the peak of this interest rate cycle after the RBA’s latest inaction. But do not anticipate a big easing anytime soon.

Floating rates are likely to be around current levels for the first six months, but with banks competing for market share via special promotions, continuing for the foreseeable future.

The key major banks and also now the second-tier players are taking an aggressive market approach with two and three year rates below the 8% mark.

We are seeing a long (for NZ) seven-year fixed rate offered for those borrowers who need cashflow certainty out that distance.

Variable rates still start at around 8.50% with one-year rates between 7.60% and 9.10%. The ever popular two-year fixed terms continue to be sandwiched between 7.75% and 9.25%.

Before deciding which is right for you I suggest that a careful look at expected ‘one off’ expenses and budgeting of your funds for the year ahead is a priority.  As I commented recently; do not get caught with too much on fixed terms if you have significant surplus income that could be better employed reducing your total debt carry. It is pointless to pay mortgage interest with tax paid earnings then have a bunch of shorter term investment earning taxable income.

Normally, a fixed plan will allow some lumpsum repayment without penalty. This does vary but around 5.00% of the fixed portion can be repaid in any one 12 month period.

While the five and seven year fixed rates do look attractive it is very difficult to pick what floating rates might be that far across the horizon. If the NZ economy does drop into a period of recession (and it looks like this is a certainty) it might be time to keep the rates either floating or short, fixed say 12months only.

Original Article published February 2006