Many hoping for rate falls next year, mortgage adviser says
While it’s possible that mortgage rates will be lower in a year’s time, an Auckland-based mortgage adviser is encouraging borrowers to consider the possibility that they won’t be.
Following a period of rapid monetary policy tightening, the official cash rate has remained steady at 5.5% since May.
Close to 90% of New Zealand mortgage borrowers are on fixed mortgage rates, which have pushed higher over recent months amid wholesale funding costs and competition for deposits.
Grant Stephens (pictured above) mortgage adviser at Personalised Mortgages said that with interest rates assumed to be at or near the peak, borrowers’ attention had moved from nervousness about further hikes, to how quickly rates might drop.
He said that fixing the mortgage for one year was initially viewed by many of his mortgage clients as the most attractive option.
“Initially most people are looking at the 12-month mark and that’s because they’re hoping and wishing their rates are going to be lower in that time,” Stephens said. “But based on what we’re seeing with underlying bank funding costs, it’s probably not going to change significantly.”
Fixed mortgage rates have risen over recent months, banks citing increases in wholesale funding costs and competition for deposits as among the contributors to higher rates.
Stephens, who worked for BNZ for nine years and is in his fifth year as a mortgage adviser, said that conversations about fixed rates often led to coaching clients on the possibility that rates wouldn’t fall within a year and remain higher for longer.
On average, those conversations land at a decision to fix the mortgage around the two-year mark, he said.
“For example, if you look at the weighted average of that interest rate, if it’s at 7.09% now and 7.09% or worse in 12 months, that’s not as good as fixing for 2 years at 6.89%,” Stephens said.
In deciding how long to fix for, Stephens said that borrowers needed to weigh up the value of certainty and the current available rate against the opportunity for a better rate down the track.
“I’m encouraging people to look at the longer term on the basis that hopefully things will be better in two-to-three years’ time than they are now,” he said.
New borrowers better positioned for higher fixed rates
As new borrowers are buying based on current rates with the view that rates will eventually come down, Stephens said that those taking out mortgages now were hopeful that looking forward, things wouldn’t get any worse.
“If they can manage the [mortgage] at this level now, it’s likely that they’ll be able to manage it in the foreseeable future (ruling out any further rate hikes), he said.
Citing a recent example of a client with a mortgage rolling off a 2.55% fixed rate onto a rate in the 7% range, Stephens said existing customers were finding current mortgage rates more of a challenge.
He noted that some borrowers were carrying high debt levels and bought near the peak of the property market, their mortgages rolling off onto almost “triple the interest rate” in some cases, which is “a pretty big jump”.
Existing borrowers focused on managing cost
Stephens said that conversations with existing borrowers around managing higher repayments centres around what their options are and how they will accommodate the cost within their budget.
If clients are struggling and their incomes haven’t increased, making interest-only repayments on a temporary basis is an option, in the view that they’ll be in a better position down the track and can start paying down debt again, he said.
Stephens said that he encouraged clients with surplus cash to use it to minimise their loan repayments, while retaining the flexibility to redraw those funds if needed. Revolving credit can be a good tool to help people be more comfortable in the position they’re in.
“Most people like to have a buffer and a fall-back position, and so it doesn’t make sense to put every spare dollar to pay down your mortgage unless you can reaccess that without having to go back to the bank,” Stephens said.
Having worked with clients through a couple of property cycles, Stephens said that new lending volumes were not as strong as when house prices were rising, with refinances becoming more frequent, including restructuring of loans and helping clients to save money.
“There are a lot of queries about pricing, but at the same time, many clients are asking for preapprovals and trying to get into a position to buy again,” he said.
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