HOME TRUTHS
When you should break your fixed mortgage
Mortgage brokers say unless borrowers have around three months or less to go on their fixed term the savings on a lower home loan rate are unlikely to outweigh the break fee cost.
Fixed mortgage rates have fallen to all-time lows in recent weeks with borrowers able to nab 2.65 per cent over one year and 2.69 per cent fixed over two years.
That makes it tempting for those who fixed their mortgage in the high 3s to break the term and obtain a lower interest rate. But it’s not that simple, mortgage brokers say.
“It is very rare these days for it to make financial sense to break a loan,” says John Bolton, head of Squirrel Mortgages.
Bolton says rates falling to new lows won’t help people that fixed a year ago when they were around the high 3s or early 4s. “Rates going lower just makes it worse for them.
“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.
It basically works out how much a bank will lose out on by not having the interest you agreed to pay them as part of the fixed-term agreement.
Banks are not allowed to make money out of break fees but can ensure they aren’t out of pocket.
Borrowers can find out exactly what the break fee will be by contacting their bank, although mortgage brokers and some websites offer break fee calculators to give a guide.
Then you’ll need to work out how much interest you’ll save by using a mortgage calculator like the one on the Government-backed 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 . . . find they are prohibitive compared to the interest they are saving.”
Exactly what timeframe that was depended on the bank, she said. “It’s usually around three to six months.”
According to Reserve Bank data, Kiwis had $241 billion out of the $284b of the money borrowed from banks against residential property on a fixed term in May.
For owners occupiers $61.6b out of $173b is fixed between one and two years and a further $55b was fixed between six months and a year.
That means about two-thirds of NZ’s owner-occupier bank home loans are fixed for between six months and two years.
Many borrowers have been using six-month home loan terms instead of the floating rate in recent years because floating rates have remained much higher than fixed term rates.
Kiwibank dropped its floating rate to 3.4 per cent last month but no other major banks have followed suit.
Even that floating rate is much higher than the 2.65 per cent many banks are offering for one year fixed.
Tatterson said given there was an expectation that rates could fall further she doesn’t recommend people lock in rates for longer terms. “I personally wouldn’t fix for more than a year in this market.”
The official cash rate is at 0.25 per cent and there is some expectation that the Reserve Bank could take it negative next year. Governor Adrian Orr has said he would like to see mortgage rates head lower.
Tatterson says she wouldn’t be surprised to see mortgage rates head down to around 2 per cent.
First-home buyers & ex-pats
Outside of those looking to re-fix their existing loan, brokers are reporting strong interest from the first-home-buyer market and returning ex-pats looking to buy.
Bolton said the first-home-buyer market was crazy-busy.
“We have probably had a 300 per cent increase in cases coming through — and that is really high.”
He said housing turnover in Auckland had been low for some time, with about a 30 per cent reduction in the volume of house sales 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 “doused a bit of fuel on it” and brought it back to life again.
Bolton said interest rates were so low it was cheaper to buy than rent.
“People are looking at it and thinking “s**t, at these rates I should buy”.
But he also predicted some disappointment for first-home buyers.
“The problem . . . [is] they are all very driven by sentiment and confidence. They tend to run in and out of market as a pack.”
They were all competing for the same houses with very limited stock and were typically looking for houses up to $800k.
Bolton said returning Kiwis were being quite active too, and coming back with quite a bit in deposit funds.
They were looking to buy in the $1.5m to $2m 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.”
Bolton said banks were only comfortable doing low deposit lending if the borrowers had high job stability.
High bar remain
Brokers say the servicing tests at banks remain around 7 per cent despite the rates falling so low.
“That’s particularly tough for people trying to borrow more money. That is probably the thing that holds people back,” Bolton said.
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 plenty of queries were coming though, with a variety of applicants from first-home buyers to upgraders and downsizers.
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 with the Reserve Bank dropping loan to value ratio restrictions on banks, 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 were unable to get a home loan because their deposit was too small. Service testing levels — particularly for firsthome buyers — “should be around 5.5 to 6 per cent rather than around 7.”