ASB urges mortgage mix for borrowers

Floating and short-term fixed mortgage rates appear set to remain at present levels into 2019, but borrowers are being cautioned to consider the longer-term effects of paying potentially higher interest rates.

The relatively low mortgage rates at present should prompt borrowers to be looking closely at either splitting their mortgage into different terms, or taking out a mix of floating and short-term fixed mortgages, ASB economist Kim Mundy said.

``More recently, bank competition seems to have been the main driver of the slightly lower rates,'' she said in ASB's latest home loan report.

Bank rate movements aside, Ms Mundy said the OCR was likely to remain on hold until November 2019, meaning floating and shorter term fixed rates should ``remain relatively stable'' into 2019.

However, she cautioned that mortgage rates were influenced by a number of factors, which can make picking the next move ``more tricky''.

The most recent review by the Reserve Bank of its interest-driving official cash rate (OCR), held again at 1.75%, carried a ``neutral bias'', in that the rate could move either way, but most analysts expect no move until at least September next year.

Ms Mundy's bias for longer-term mortgage rates is for them to ``drift up'', given gradual increases in the OCR along with global longer-term interest rates also expected to rise.

``US longer-term interest rates remain elevated, increasing the chance we see these pressures flow through into New Zealand mortgage rates.''

Ms Mundy said the higher offshore rates tended to influence domestic tenors longer than the two-year fixed rate.

She said borrowers' personal preferences for certainty and flexibility were important considerations when choosing a mortgage rate, as opposed to just opting for the lowest rate on offer.

Borrowers can at present get some certainty and a lower rate by fixing their mortgages for short terms, she said.

``Splitting the mortgage into different terms, or a mix of floating and short-term fixed mortgages, is a strategy for keeping some flexibility while locking in some interest rate certainty.''

Ms Mundy said the caveat to that strategy was if mortgage rates moved up more aggressively than expected.

The rates for two and three-year fixed mortgages were ``relatively low'' and both offered certainty; while the five-year rate was 130 basis points higher than for one year; albeit the 5.99% rate was lower than the average level of the past decade, which is 6.85%.

On the question of the effect on investors of the Reserve Bank's loan to value ratio (LVR) restrictions, Ms Mundy ``did not expect to see any further tweaks'' soon.

Most recently, the central bank has eased its LVR restrictions, with an investor's deposit size declining from a mandatory 40% to 35% and banks portfolios of new lending was pushed out from 10% of total lending to 15%; while owner-occupiers' deposits remained at 20%.


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