The OCR is expected to fall further this year, but the drop has already been largely priced into rates. File photo. Photo: RNZ
If you're thinking about fixing a mortgage, you're probably wondering what term to choose.
All the major banks are offering one-year fixes of 5.79 percent, according to Mortgagerates.co.nz, while there is 5.49 percent on offer for two years, and 5.59 percent for terms from three years out to five.
The official cash rate is expected to fall further this year, but much of the drop has already been priced into rates.
So is it worth taking a longer term?
Infometrics chief forecaster Gareth Kiernan conducted some analysis of interest rates based on a $100,000 mortgage.
He looked at the total interest rate cost over a five-year period on a floating rate, fixing every year on a one-year rate, fixing every two years on a two-year rate and fixing every three- four- and five years on those longer rates.
"Obviously these strategies are somewhat simplistic, because people are likely to fix for different terms depending on what rates are on offer," he said.
"However, it demonstrates the cost or savings of blindly sticking to one strategy, or picking the wrong length of time to fix for."
He used forecasts of mortgage rates in the coming years, and actual rates for years in the past. The calculation was done on interest only.
He said if someone fixed for one year in March 2021, and continued to fix for one year each March after that, by March 2026 they would have paid $25,530 in interest.
"If you'd repeatedly fixed for two years from this date, your interest would total $23,620; three years, $21,410; four years, $17,603; five years, $15,050; floating, $34,879. Clearly fixing for five years at 3.01 percent was the best option, with the benefit of mostly hindsight."
But he said that was unusual. Usually fixing for five years did not turn out to be the best option.
"Apart from 2020/21, the only other times are a few small windows in the mid-2000s. In fact, between 2007 and 2018, a five-year fix was almost always the most expensive option, often by a considerable margin.
"Typically, fixing for five years is going to be most attractive - or perhaps least unattractive - just before five-year rates start to rise. Of course, you don't know when that is going to occur, but jumping in just after they've started rising can sometimes be ok - it doesn't necessarily turn out cheaper than other options, but the scope for regret tends to be less.
"In general, you also end up paying a bit of a premium for the certainty associated with rates of three to five years. Sometimes this premium is so large that floating would have been better."
He said one- and two-year rates were rarely more expensive than floating and the one-year rate was often the lowest available.
On average, over the past 10 years, a series of one-year fixes would have cost $23,842.11 over five years on a $100,000 home loan, compared to $24,250.41 for two-year fixes and just over $25,000 for three-year fixes.
"It's really difficult to pick, but shorter fixed terms will generally be more cost-effective. The time you should consider longer terms is when they've just started pushing upwards - even if they're the highest rates compared to shorter terms on offer at the time."
Kiwibank chief economist Jarrod Kerr said he favoured splitting his own loan into smaller parts across a range of fixes. "And I think rates have a little further to fall."
Corelogic chief property economist Kelvin Davidson said there had been a "stampede" to short loans. "To the point where 47 percent of new lending in November was floating, and it's not hard to imagine a similarly quick shift the other way if/when the RBNZ signals some kind of end or slowing to OCR cuts, and possibly global uncertainty lingers."
He said the data indicated people did not see much value in those longer rates yet.
"But I could imagine it happening this year. We should probably all learn a lesson from 2021 when taking the candy of the shortest or one-year rates didn't prove to be the best strategy - of course, you only ever know that in hindsight. And of course, some people may well see value in the current longer rates for their own situation if they just want certainty."
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