Fixed-rate popular as interest hike expected

pay would not bother fixing in the final few years of the loan.

Others might be hedging their bets by fixing half their loan and leaving the other half floating.

Mr Alexander and Mr Bagrie both expected interest rates to rise in early 2014, adding the caveat that it was still a highly uncertain global environment. SHORT and sweet fixed-rate mortgages have officially become the favourite loan for New Zealand homeowners.

The latest Reserve Bank statistics suggest people are locking their mortgages up to try to take advantage of record low interest rates.

As recently as April last year, fixed mortgages accounted for just 37 per cent of the total loans by value on the big banks’ books.

Since then almost $20 billion worth of mortgage money has flowed out of floating loans and into fixed terms.

The figures for May show that $93b worth of home loans, or 51 per cent of the total, are now on fixed rates.

ANZ chief economist Cameron Bagrie said most people had woken up to the fact that historic low interest rates were coming to an end.

Wholesale interest rates have been rising steadily behind the scenes, leading to several banks bumping uprates and scrapping ‘‘specials’’ in the past two weeks.

Most economists believe the Reserve Bank is likely to start raising the official cash rate, currently at 2.5 per cent, early next year.

But Mr Bagrie said anyone looking to insure themselves against the upward drift would need to look beyond short-term loans.

‘‘If you’re on a floating, one or two-year rate, you’ll have to face the music at some stage.’’

Reserve Bank figures show the vast majority of borrowers fall into these shorter-term categories, which are the main target of banks’ promotions and special offers.

‘‘That says to me people aren’t going into these fixed rates as a precautionary measure,’’ said BNZ chief economist Tony Alexander. ‘‘It’s simply that they’re cheap.’’

For more than two years, floating mortgage rates have been consistently sitting around 5.75 per cent.

They have been undercut by the short end of fixed terms, which have even dropped below 5 per cent at times.

Those who continue to float are effectively betting that rates will stay lower for longer than expected.

They also have a much greater degree of flexibility, as making extra repayments can rack up penalties on fixed contracts.

Even while fixed mortgages have taken the lead by dollar value, there are still 300,000 more floating loans on issue.

Mr Alexander suggested that those with smaller balances left to