BNZ chief economist Tony Alexander has issued a warning for the many young people who are taking out a mortgage for the first time.
"Currently, you're being courted aggressively by the banks and offered some very good interest rates which your parents could only dream of. But what you probably don't know is that here in little old New Zealand, interest rates can move around quite a lot and just as we can all gape in wonder at the beauty of low interest rates, so, too, in the past have we looked in horror at skyrocketing rates."
Although floating rates were now near 5.8%, back in mid-2008 they were on average 10.9%, he said.
While not picking a return to such rates in the next few years, no-one predicted the sharp fall in rates in 2008-09 or even the most recent round of cuts in fixed interest rates.
"So, if you are making your home purchase decision on the basis of the current low level of interest rates continuing for many years, you are gambling against the odds."
Young people considering first-time mortgages should run a scenario of how they would be left if the floating rate went to 8.5% in three or four years' time.
He recommended young mortgage holders used the cash flow advantage provided by current low borrowing costs to reduce the principal as quickly as possible and put holiday and major appliance purchase plans on hold for the first five years of the mortgage.
"Your priority is putting yourself into a position where you will not lose your house in five years if interest rates jump up, your employment takes a hit and house prices ease back."
Mr Alexander favoured fixing for three years at the current rate of 5.75%. The rate was nearly the same as floating and gave a cheap rate certainty for a longer period than the 5.1% 18-month rate which many people were finding attractive.
However, just as he had highlighted in late February, his recommendation was not based on a view that floating rates were going to increase anytime soon.
It seemed unlikely the Reserve Bank would increase the official cash rate from 2.5% until the end of next year, if not early 2014, given the clear lack of accelerating growth in the New Zealand economy, the low pricing power for businesses and the troubling economic conditions offshore.
"So, if you stay floating, I think that is a very good strategy. I simply have a personal preference for some rate certainty in these uncertain times which are likely to be with us for many years."
The Reserve Bank was unlikely to cut interest rates when the housing market was already clearly moving upwards with rising interest from investors, he said.
The economy would be stimulated by the rebuilding of Christchurch over the next three years, there would be a small stimulus running through the economy from the recent depreciation of the dollar and interest rates had already been cut by banks responding to falls in the wholesale rate.
"My expectation is that market pricing will eventually adjust to take away rate cut expectations and, when that happens, bank borrowing costs will rise again and fixed home lending rates will be reversed."
