Mortgage Rates - 2017 discussion

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lookout

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#208601 19-Feb-2017 07:49

It looks like almost all the banks are raising mortgage interest rates again, despite the OCR not changing.

HSBC have a special 3.99% for 18 months which is tempting but who knows where we will be in 18months?

TSB offer 10 years fixed at 5.75% while BNZ offer 7 years fixed at 6.15%

Our fixed rate is coming to an end next month so I'm wondering how long to fix for this time.

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#1722528 19-Feb-2017 08:13

Let me tell you this. I've subscribed to the BNZ chief economist's newsletters since 2003. He has forecast imminent interest rates rise since 2003. You know what, it's only gone down and lower since. Yes there were blips, but global events meant they kept going down for some reason.

Guess what, they're still predicting interest rates rise. I can do that since 6 years old - I was told what goes up must come down (and vice versa).

Economics is at best like a 10 year weather forecast, at worst, crystal ball.

Can interest rates rise? Of course. Do economists know? Hahahaha ...

what to do -

if you can afford the risk fix all at 3.99

if not and you don't want to lose out, fix half at 3.99 and half at 10%

i don't know how people do math ... no brainer for me to fix 100% at 3.99 but i can afford the risk

pedrogarcia

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#1722529 19-Feb-2017 08:16

About to refix with Kiwibank for another 3 years and am expecting around 5.5%. Would switch but we're topping up for a house extension. Damn 10 years is tempting though for the certainty.

ShiroHagen

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#1722532 19-Feb-2017 08:48

pedrogarcia: About to refix with Kiwibank for another 3 years and am expecting around 5.5%. Would switch but we're topping up for a house extension. Damn 10 years is tempting though for the certainty.

I've just signed with Kiwibank for 3 years at 4.85% plus a nice cash incentive to switch. Although 2 year rates were about 4.5% at the time, the cash incentives for all the banks we approached had 3 year lock in terms for them, so I felt the 0.35% extra was worth it vs the uncertainty of refixing 2 years down the track, and having to remain with the same bank or forfeit the ENTIRE cash incentive (no pro-rata I checked).

At the end of the day, you've (hopefully) got some sort of strategy for paying off your mortgage as soon as reasonably possible whilst enabling you to have a life.

So the only person who can answer your query about how long to fix is you. You look at the rates, you run some numbers though Sorted calendar or similar and compare it to your "plan" all whist trying to imagine your life in 2 / 3 / 5 / 10 years time. Not easy I know.

Ouranos

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#1722555 19-Feb-2017 10:32

The best option depends on your circumstances and tolerance for risk.

However, the way I look at it is as follows:

Option 1: Fix for 10 years at 5.75%.

Option 2: Fix for 18 months at 3.99% and then at some unknown rate (or rates) for the remaining 8.5 years.

For simplicity, I assume you can make payments in Option 1 that will pay off the mortgage over the next 10 years. That is, the balance reaches zero at the end of year 10 in both options.

For Option 2, a naive analysis implies an average interest rate of 6.06% for the remaining 8.5 years: (1.5 years * 3.99% + 8.5 years * 6.06%)/10 = 5.75%. However, given that you'll pay off some of the balance over the first 18 months, the equivalent interest rate for the remaining 8.5 years is actually a bit higher: about 6.5%.

So, the options are:

Option 1: Fix for 10 years at 5.75%.

Option 2: Fix for 18 months at 3.99% and then 6.5% for 8.5 years.

There is a possibility that mortgage interest rates will rise to average 6.5% or more between mid 2018 and 2027. Who knows. If interest rates between mid 2018 and 2027 average less than 6.5%, then you'll be better off with Option 2.

With a mortgage, you pay more interest now than you'll pay later as the outstanding balance is higher now than it will be later (hopefully!). That is, now is the time when the interest rate makes the most difference. Therefore, the lower the interest rate now, the better.

Consequently, I would take Option 2 and pay off the mortgage as fast as possible. The more you pay in the first 18 months, at the low interest rate, the less risk there is in the remaining 8.5 years.

alasta

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#1722591 19-Feb-2017 11:27

What were interest rates prior to the GFC? It's all very well to suggest paying off the mortgage in ten years but a first home buyer is more likely to be looking at a 25 or even 30 year term, so I'm thinking in that scenario you would need to be able to still service the debt at 8%?

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#1722619 19-Feb-2017 12:25

Current Interest Rate: 5.89% per annum

Interest Rate Review Date: Sunday, 20 April 2025

We fixed on the TSB 10 year rate almost 2 years ago, slightly higher than it is now. I thought the rates would have gone up a lot more by now, but that's the gamble you take.

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lookout

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#1722632 19-Feb-2017 13:06

I see the 3.99% deal offered by HSBC is for loans over $500,000 which to me is massive. However, I guess that's much lower than what many [Auckland] first home buyers are having to borrow.

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#1723032 20-Feb-2017 14:58

We've just re-doc'd our loan, borrowing extra to do some work on our house. With a new valuation recognising the rising value of our house we have been able to move off low-equity rates into something much lower. With BNZ, we have a nominal amount in TotalMoney, with our combined accounts offsetting the interest on that portion. The floating rate of 5.79% (less a discount through a WorksPerks package) is effectively zero for at least a little while as we wait to pay off the bills for the building work. The rest of the loan is fixed for 18 months at 4.75% (again, discounted). I'm happy with that. There might be slightly cheaper rates out there, or we could have haggled and played off other banks against them, but in the end customer service and satisfaction are important to me. I've been very happy with our bank and banking advisor, and it's worth a few dollars here or there to maintain a good banking relationship.

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#1723084 20-Feb-2017 15:30

lookout: I see the 3.99% deal offered by HSBC is for loans over $500,000 which to me is massive. However, I guess that's much lower than what many [Auckland] first home buyers are having to borrow.

yeah $500k for a mortgage is nothing man :P that will buy you a 2 bedroom 30-60mins (depending on traffic) away from the auckland CBD.

Last time I fixed at 5.85% for 3 years. it just went down. fixed now for 4.15% for 2 years, 120k is floating, going to fix that soon.

KrazyKid

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#1723099 20-Feb-2017 15:43

First time I fixed for two years, interest rate went done & I lost.
Second time I read the tea leaves better & interest rates went up, I won.
Last time I was on the losing side.

Saying all that it probably ended out even as at some points in the loan I would have been ahead when fixing - I only fix if there is a cost saving.

As for a 10 year loan, 3.99% is pretty good - I'd be amazed if interest rates get this low again for ages... remember my track record at predicting though :)
I've paid 7% before and remember my parents paying 20+%!!!!

Also most fixed loans only let you pay a certain portion off a year (say 5%) so it is unlikely you will be able to pay it in full off early with-out significant break costs.
But if you feel you want be in that position, having a fixed amount to pay each month for the next 10 years can be attractive for some people.

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#1723118 20-Feb-2017 15:58

alasta:

What were interest rates prior to the GFC? It's all very well to suggest paying off the mortgage in ten years but a first home buyer is more likely to be looking at a 25 or even 30 year term, so I'm thinking in that scenario you would need to be able to still service the debt at 8%?

If interest rates went up to 8%, I suspect many people would be forced to sell up. To service that on a 600-800k mortgage, which is what many in Auckland have been getting, would require a huge salary!.

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lookout

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#1723129 20-Feb-2017 16:12

mattwnz:
alasta:

What were interest rates prior to the GFC? It's all very well to suggest paying off the mortgage in ten years but a first home buyer is more likely to be looking at a 25 or even 30 year term, so I'm thinking in that scenario you would need to be able to still service the debt at 8%?

If interest rates went up to 8%, I suspect many people would be forced to sell up. To service that on a 600-800k mortgage, which is what many in Auckland have been getting, would require a huge salary!.

Yes and I imagine the banks have little incentive to raise interest rates drastically (if it means increased mortgagee sales)

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#1723165 20-Feb-2017 17:21

However the banks may not have any choice but to raise rates if they pay more to borrow money.

I don't really know much about the period of 20%+ interest but I suspect there was a spike in mortgagee sales then which the banks would not have wanted to see either.

As for a 10 year loan - But what happens when you want to sell your house to by another - break fees?

10 years is a long time - lots can and will happen to rates over 10 years. But it may well suit your circumstances to fix part or all of your loan for 10 years.

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#1723172 20-Feb-2017 17:57

There's not much the banks can do about interest rates, it's got nothing to do with not wanting to see you at a mortgagee sale auction.

Because our banks are so small, they don't have a lot of capital. So they borrow money from overseas and sell it to you (for a handsome profit).

So whatever they buy the lending at, you pay at the other end.

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#1723189 20-Feb-2017 18:34

lookout:

Yes and I imagine the banks have little incentive to raise interest rates drastically (if it means increased mortgagee sales)

It all comes down to how cheaply they can buy money for. Locally at the moment, they are reducing their oncall savings rates, which are pushing those people who had money on call, into putting their money into term deposits. So those people who are oncall are now getting around 2%, but they are lending that money out at 5%, so the gross margin is 3% which is pretty good. Really all banks care about is the margin they make. It makes little difference what the actual rate is to the banks, as long as the percentage margin they make is still good. Although obviously the low rates are meaning that people can afford to borrow more, so the banks win on that too, which has only help to increase house prices. But high house prices aren't a good thing for most people.

This is a scary graph on houses I saw today, showing the changes in price to income, and price to rent ratios, compared to other countries. Potentially if rates head skyward, it could be a rough landing.

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