Everyone knows staying on floating is the best thing to do at the moment, right?

Maybe. Maybe not.

This week the Reserve Bank (RBNZ) kept the Official Cash Rate (OCR) on hold and signalled no increase in this rate until next year, thanks in large part to the problems in Europe where the economy seems to be stumbling and lurching like a drunk teenager on a Friday night on Queen Street. Sounds like a good reason to stick with the floating rate, right? Read on…

NZ banks make a fatter profit margin on floating rate mortgages than fixed rate mortgages. That’s the main reason why the standard floating rate is higher than the 1 and 2 year fixed rates. If you compare to the wholesale money market which is where banks source much of the money they lend out, floating rates should be lower. Herein lies the reason banks have the ability to reduce the floating rate they charge you (if you put up a decent argument and ask nicely).

Another thing to be aware of is that when rates do start to move up (as they inevitably will), the fixed rates will rise before the floating does. This is because fixed rates are based on what is likely to happen in the future (2-5 years out) whereas floating rates tend to be focussed more on where the RBNZ sets the OCR and that’s a shorter term thing.

And it may not pay to wait until the last minute before you fix, because I think the fixed rates could increase suddenly and sharply, rather than slowly and gradually. At the moment about 2/3 (or about $100 Billion dollars) of NZ mortgages are floating, far more than has been the norm over the last 10 years.

My guess is that at the first sign of an increase in rates the banks are going to be faced with literally tens of billions worth of floating mortgages looking for a fixed rate home. While banks do have pots of money to lend only so much is available on a fixed rate and economics 101 tells that if you get huge demand for a limited supply of something then the price of it goes up. In fact we saw a mini version of this at the end of 2009 as everyone rushed for the door and all fixed rates spiked.

With the Christchurch rebuild finally getting underway, Asia still growing despite the chaos in Europe and the US economy showing some signs of recovery, there is a reasonable chance that the NZ economy will begin to recover sooner than predicted taking interest rates with it.

We totally think people on a floating rate right now should be having the conversation about how a fixed rate might benefit them (or not, as the case may be). Have a chat, understand the pros and cons as they relate to you and be ready to move if you need to.

Please remember that my comments are general in nature and no substitute for advice about your own circumstances. Do not hesitate to give us a call to talk through your personal situation.



About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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