Six-month term borrowers' best bet

ASB economist Chris Tennent-Brown said because the Reserve Bank was expected to keep the official cash rate low for the next few years, rolling six-month fixed terms looked to be the cheapest home loan strategy.

Banks offer rates between 4.99% and 5.39% on six-month terms, much cheaper than floating rates of about 6%.

But the term is not so long that borrowers cannot take advantage of other offers as they come up. 

Tennent-Brown ran a mathematical calculation on interest rates, not including the banks' special rates, which are limited to borrowers who meet certain conditions, such as having 20% equity and multiple products with a bank.

He said in some cases, customers could get rates that were cheaper than the six-month rate for longer terms.

One-year specials are available as low as 4.35% and two-year specials for 4.65%.

“On an historical basis all the terms are amazingly at below long-run averages. All terms by that measure offer very attractive rates.”

But he said borrowers taking those rates would have to be aware that if rates then fell further they would be locked in and unable to take advantage of them.

If their circumstances changed, longer-term rates would be the most expensive to break.

Infometrics economist Benje Patterson agreed short-term fixed rates looked attractive. “Given these expectations of falling fixed rates, mortgage holders who choose to only fix for less than one year are likely to be able to lock in an even lower rate in the first half of 2016,” he said.

“There has been talk that a lower official cash rate, coupled with elevated competition between retail banks, could even see some special fixed rates over shorter terms slipping below 4%.  These shorter-term fixed rates could begin to rise again by 2017, if inflation picks up as the Reserve Bank is expecting and the official cash rate is increased in response.”

But he said the situation was a bit different with longer-term rates, which are more affected by global pressures.

Those who wanted to lock in a longer rate could do well to act soon.

“At present there has been downward pressure on these rates, but this pressure is expected to soon abate as the US Federal Reserve eventually begins lifting its target interest rate later this year.  As a result, mortgage holders who want the certainty of a longer-term fixed rate should bargain hard with banks over the coming months to try and secure the best rate they can now.”