Move to short term but higher rates

Short term fixed rate loans surged in the first few months of the year.

Across loans for house purchases, top-ups, and bank switches, 36% in December (by value) were fixed for up to one year, but by February, that figure had risen to 56%.

The increasing preference to ‘fix short’ comes at a cost, however, with one-year special rates still about 0.6% higher than three-year rates.

CoreLogic says many borrowers are prepared to pay more now, with the hope of saving money later as mortgage rates fall over the medium term.

So, how much do interest rates need to fall to make this strategy of paying a higher rate to go short worthwhile? BNZ chief economist Mike Jones lays out an example.

It’s possible to fix for two years now at about 6.80%. Alternatively, a borrower could fix for one year at about 7.25% and then, assuming rates do fall, roll onto a lower one-year rate in a year’s time.

“To ‘break-even’ on the shorter-term strategy, the one-year rate in a year’s time needs to be about one percentage point lower, so about 6.30%, based on current market pricing.”

Jones says on the face of it, BNZ’s interest rate view and forecasts suggest there’s a good chance of that scenario playing out.

“All else being equal, that suggests there may be value in fixing for a short-term like the one-year.”

That option also provides less certainty about future payments, but even though BNZ economists see less risk of interest rates going higher, forecasts don’t always go to plan.

Hence there may also be value for some borrowers in looking at slightly longer fixing terms, rates for which have fallen a bit further recently, he says.

Still tough to get mortgages

Buyers for existing properties without the required deposit are still finding it tough to get around the loan-to-value (LVR) ratio rules, with banks keeping a buffer between actual high LVR lending and the maximum allowance.

CoreLogic says interest-only lending remains relatively low, although there has been tentative evidence of an upwards trend again for investors in the past few months – something worth watching.

About 59% of existing mortgages by value are fixed but due to reprice onto a new, and generally higher, mortgage rate over the next 12 months.

This will require a significant adjustment to those households’ finances. At least in terms of new lending flows, however, loans at high multiples of debt to income have fallen to low levels, held down simply by the existing high mortgage rates.

Meanwhile, households and businesses will be under financial pressure until the middle of next year, Infometrics chief forecaster Gareth Kiernan says.

"Between then and 2027, lower interest rates, less contractionary fiscal policy and the improving world economy will all contribute to an acceleration in economic growth back towards 3% per annum.”

Infometrics is forecasting annual inflation to drop below three per cent by early 2025, which will give the Reserve Bank confidence to begin cutting the Official Cash Rate in November from 5.5% to a neutral rate of 4% by the end of next year.

The biggest share

First home buyers (FHBs) remain a strong presence in the property market, with a 26% share of purchases in March itself, and across the first quarter as a whole. The number of FHB deals is also solid, Davidson says.

FHBs are enjoying lower house prices than at the peak, less competition from other buyer groups, and also some other support – such as KiwiSaver - for the deposit and access to low-deposit finance at the banks.

Relocating owner-occupiers (‘movers’) have had a fairly stable market share, at about 26%, for about the past 18 months, while mortgaged multiple property owners have also been relatively steady, but at a low level compared to past standards.

Significant top-ups out of other income are still required for a typical rental purchase, making it difficult for mum and dad investors to commit to a purchase.

For those who are less reliant on the bank – i.e. cash investors – there’s been a small uptick in market share lately.

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