Wait for rollover, brokers say
AUCKLAND: Mortgage brokers say unless borrowers have about three months or less to go on their fixed term, the savings on a lower home loan rate are unlikely to outweigh the breakfee cost.
Fixed mortgage rates have dropped to alltime lows in recent weeks, borrowers able to nab 2.65% over one year and 2.69% fixed over two years.
That makes it tempting for those who fixed their mortgage in the high 3s to break the term.
But it is not that simple, mortgage brokers say.
‘‘It is very rare these days for it to make financial sense to break a loan,’’ head of Squirrel Mortgages John Bolton said.
Rates falling to new lows would not help people who fixed a year ago when they were around the high 3s or early 4s.
‘‘Rates going lower just makes it worse for them.
‘‘My advice is you have just got to hang out and wait for your fixed rate to roll over.’’
Break fees are calculated using a complex formula, which is slightly different for each bank. Basically, it works out how much a bank will be out of pocket by not having the interest you agreed to pay them as part of the fixedterm agreement.
Banks are not allowed to make money off break fees but are allowed to ensure they are not out of pocket.
Borrowers can find out exactly what the break fee will be by contacting their bank, although mortgage brokers and interest.co. nz offer breakfee calculators that can give a guide.
They can work out how much interest they will be saving by using a mortgage calculator such as the one on governmentbacked money education website sorted.org.nz.
Karen Tatterson, of Loan Market, said it only made sense to break a loan if a person had a really short term to go.
‘‘Most people looking at the break fees find they are prohibitive compared to the interest they are saving.’’
The exact timeframe depended on the bank.
‘‘It's usually around three to six months.’’
According to Reserve Bank data, New Zealanders had $241 billion on fixed terms in May, out of the $284 billion of the money borrowed from banks against residential property.
For owneroccupiers, $61.6 billion out of $173 billion was fixed between one and two years, and a further $55 billion was fixed between six months and a year.
That means about twothirds of New Zealand's owneroccupier bank home loans are fixed for between six months and two years.
Many borrowers have been using sixmonth home loan terms instead of the floating rate in recent years because floating rates have remained much higher than fixedterm rates.
Kiwibank dropped its floating rate to 3.4% last month but none of the other major banks have followed suit.
Even that floating rate remains much higher than the 2.65% many banks are offering for one year fixed.
Ms Tatterson said given there was an expectation rates could fall further, she did not recommend locking in rates for longer terms.
‘‘When you look at where the market is sitting, it would be unwise to take a longterm rate.
‘‘I personally wouldn't fix for more than a year in this market.’’
The official cash rate is at 0.25% and there is some expectation the Reserve Bank could take it negative next year.
Reserve Bank governor Adrian Orr has said he would like to see mortgage rates head lower, and Ms Tatterson said she would not be surprised to see them around 2%.
Outside of those looking to refix their existing loan, brokers are reporting strong interest from firsthome buyers and returning expats.
‘‘We have probably had a 300% increase in [firsthome] cases coming through — and that is really high,’’ Mr Bolton said.
Housing turnover in Auckland had been low for some time, with about a 30% reduction in volume before Covid.
‘‘In a way, that is why you haven't seen a profound effect from Covid.’’
He said Auckland had a lot of pentup demand and the low interest rates had brought it back to life.
Interest rates were so low it was cheaper to buy than rent.
‘‘People are looking at it and thinking ‘s..., at these rates I should buy’.
‘‘I think interest rates are a huge driver and the perception they can get a good deal.’’
But he said there would also be a bit of disappointment for firsthome buyers.
They were all competing for the same houses with very limited stock and were typically looking for houses up to $800,000.
Mr Bolton said returning Kiwis were active as well and were coming back with quite a bit in deposit funds.
They were looking to buy in the $1.5 million to $2 million price band, he said.
But credit was tighter than ever. ‘‘It will probably be like that for another three or four months until we get through these mortgage deferrals. Until the banks get confidence the market is stabilising, they are going to be very reluctant.’’
He said banks were comfortable doing lowdeposit lending only if the borrowers had high job stability.
‘‘They want you to be in job for a year and in the industry for at least five years with a good surplus income.’’
Brokers say the servicing tests at banks remain around 7% despite the rates falling so low.
‘‘That is really tough. That's particularly tough for people trying to borrow more money. That is probably the thing that holds people back,’’ Mr Bolton said.
Ms Tatterson said banks were being very strict.
‘‘They are conscious of not putting people into financial hardship. It is the hardest it has ever been.’’
She said there were many queries from a variety of applicants, from firsthome buyers to upgraders and downsizers.
Some people wanted to do renovations, but instead of being able to just top up the mortgage they had to go through the full loan application process.
She said loan applicants had to explain the impact of Covid and where they were at now.
Many people thought it would be easier to borrow money after loantovalue ratio restrictions were dropped, but ‘‘it hasn't really made a difference’’, she said.
The hardest thing was seeing people paying rent that was equivalent to a mortgage but being unable to get a home loan because their deposit was too small.
Ms Tatterson said banks should bring down their service testing levels, particularly for firsthome buyers.
‘‘It should be around 5.5 to 6%, rather than around 7%.’’ — The New Zealand Herald