Fears of interest rate hikes prompt homeowners to lock in longer-term rates

Fears of interest rate hikes fueled an increase in the number of mortgage borrowers opting for longer-term fixed rates.

ASB said there had been an increase in the number of borrowers opting for fixed terms of three to five years for their home loans and that around a fifth of customers now had at least part of their mortgage at these rates in the longer term, i.e. double the rate for the year. before.

A bank spokeswoman said customers were seeking certainty over future interest payments at a time when the Reserve Bank had signaled further increases in the official exchange rate (OCR), which would have a drastic effect. training on interest rates.

Currently, the big four banks are offering one-year rates of around 3.65% and three-year rates of 4.69%. That means locking in a $500,000 25-year loan for three years costs about $130 more per fortnight on a three-year rate than a one-year option.

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Kiwis historically prefer one- or two-year fixed rates, but a monthly survey of mortgage brokers by economist Tony Alexander suggested falling interest in short-term fixed rates among borrowers.

Independent economist Tony Alexander says homeowners know interest rates are likely to rise with such high inflation.

RYAN ANDERSON/Stuff

Independent economist Tony Alexander says homeowners know interest rates are likely to rise with such high inflation.

Among the survey questions addressed to brokers was the time period preferred by most clients.

“There was a big change in July, basically. That’s when things almost completely drifted a year away [terms]“, said Alexander.

Alexander said that with annual inflation at 4.9%, people knew interest rate hikes were coming, so home loan borrowers were trying to protect themselves.

He predicted one-year fixed mortgage rates would rise 1-1.5% over the next year and a half.

Alexander’s survey results show that in November 2020, the number of clients opting for short-term rates peaked, with 97% of advisors saying clients were choosing fixed-term rates from a year or shorter.

February began a rapid turnaround to the point where, in July last year, just 5% of advisors said their clients preferred one-year rates. In August, none of the respondents said that a fixed year was their customers’ preference.

Over the same period, the number of advisors saying their clients opted for three-year fixed rates rose from just 5% to 78% in November, before preferences were almost evenly split between two and three years.

Homeowners are increasingly opting for longer-term home loan periods as rate hikes look more and more likely.

Ross Giblin / Stuff

Homeowners are increasingly opting for longer-term home loan periods as rate hikes look more and more likely.

Alexander said he advised borrowers a year ago to lock in a five-year fixed rate at 2.99%, but very few people listened to him.

“I imagine the country is full of people who wish they had fixed five years at 2.99% now,” he said.

Reserve Bank data also shows that the amount of borrowing at longer-term rates has increased. The amount borrowed by homeowners with more than two years until the price reset nearly quadrupled, from $9.2 billion in November 2020 to more than $36 billion in November last year.

An ANZ spokeswoman said Things the bank had also seen a continued increase in fixed-rate mortgages, with around 90% of home loan balances now fixed-rate rather than floating.

However, the majority of customers still prefer the bank’s one- or two-year fixed rate term.

ANZ economists said it was likely a one-year rate could prove the best option. They said interest rate hikes from here would likely be more moderate, and while rates would likely be higher a year from now, they might not be high enough to be worth the risk. pay the extra for a two year rate now.

SBA economist Chris Tennent-Brown said that assuming his forecast that the OCR would peak at 2% was correct, one-year rates would not be as high as five-year rates. were already.

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