Significant turning point for home loans

Property data firm Cotality is warning that increasing numbers of New Zealand mortgage holders will face higher costs over the next six to 12 months - whatever happens to the official cash rate this week.

Chief property economist Kelvin Davidson said the market was at a significant turning point, after a period where rates had fallen.

"Over the past two years, many borrowers were rewarded for staying on short-term fixed rates because they could repeatedly reprice on to lower rates," he said.

"That strategy has become much less effective as market mortgage rates rise ahead of any medium term OCR increases."

Although the official cash rate is not expected to increase on Wednesday, most forecasters have brought forward their expectations of when it will rise.

Markets are pricing in increases, and those wholesale rates have pushed up retail prices.

Davidson said that was already influencing borrower behaviour.

Reserve Bank lending data showed floating and short-term fixed lending had become less popular over the past six months, while the two-year fixed rate had become the single most popular lending term, accounting for 29 percent of new lending in March.

"Borrowers are increasingly prioritising repayment certainty again as refinancing conditions become more uncertain," he said.

"Many households that previously focused on staying flexible are now weighing up whether rates could move higher over the next one to two years.

"We don't necessarily know what they're shifting from, but the two-year rate is very popular at the moment, and for some people they will already be seeing an increase in their interest rate. And the point is, yes, they'll be seeing an increase in interest rates, but they'll be taking that two-year rate to avoid that potentially getting even worse."

His analysis showed borrowers who fixed on very short durations more recently were already beginning to face higher refinancing costs.

Homeowners who fixed for six months in October at around 4.8 percent would now face a two-year rate - if they chose that term - roughly 30 basis points higher at 5.1 percent.

"People have got used to rolling off those previous fixed loans and seeing those rates fall. But just at the moment, it seems to be a turning point, not only for the cash rate itself, but the mortgage rates and also those decisions that people have to face up to.

"Because if you're rolling off a relatively short-term fixed rate from, say, six months ago and now faced with a choice of whether it's a one-year rate or a two-year rate that's risen and also higher than what that six-month rate was six months ago, it's a bit of a change in mentality … as rates progressively increase, you would think more and more people will find themselves in that situation."

He said while it was a personal finance decision, it had wider implications for the economy.

"If people are having to put more money on their mortgage, well, that's going to increase household spending at a time where there's also other pressures from higher fuel prices.

"That creates a more complicated environment for the Reserve Bank as it weighs inflation pressures against weaker growth and softer consumer demand."

He said even relatively small increases in interest rate could mean significant amounts of money for people with large loans.

Davidson said many borrowers had already missed the trough in mortgage rates.

The Reserve Bank's stats shows that around 43 percent of existing debt is floating or fixed and set to reprice within the next six months.

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