Ungaro&Co

Floating Rates - it’s the way of the future!!

September 11th, 2009

Floating vs Fixed - Paradigm shift arriving slowly but surely

Whether or not there is a mastermind behind this one or not, there are multiple factors which will influence NZ borrowers towards choosing a floating rate home loan vs fixed.

Currently you can find a floating home loan for 5.75% or even less in some cases. Compare this to the ever popular 2 yr fixed rate which is currently around 6.75% (or as high as 8.60% for a 5 yr). If all the indicators point to a low floating rate home loan for the next 2 yrs at least, why not consider letting your home loan float along instead of fixing it? Here’s an example: If (and there is always an if!) the floating stays around 5.75% for the next year at the very least, it would actually have to rise to 7.75% in 1 yrs time and stay there for another year, in order to make it the same cost as a 2 yr fixed rate. If you understand the simple mathematics behind that calculation, then you will see very quickly how ridiculous fixing for longer than 2 yrs at the moment is. Now this is just focussing on rates, which I always say is a big ’no-no’ - with floating rate home loans especially, there is much more to it than the rate:

1. there is no break fee penalities as  you are not repaying a fixed rate
2. there is no problem in converting it to a fixed rate later on
3. they are usually very easy to make wee lump sum payments on
4. there are also “capped rates” with some lenders, where the loan is floating, but capped at a level for safety
5. lenders may also be introduing true “offset” mortgage account facilities soon

If it was me, I would float, but I would also ‘overpay’ my mortgage slightly so that when the rates rise again, I can increase my loan term to absorb that shock - please read previous blog regarding “The Interest Rate Shock Absorber” for more info on this.

House Prices Back Up Again

According to QV Valuations, house prices are climbing back towards last year’s levels, after four months of increasing sales values. The national average sale price for August (New Zealand wide) was $385,426, only 2.8% below the same period last year. The main reason for this recovery is the shortage of stock and the demand for properties which is reasonably good. Again QV Valuations note that this is a surge rather than start of a boom. The Auckland market is recovering as well - the average sale price for August was $564,319, only 1.8% off the corresponding figure from August last year. (source:James Lockie at General Finance Limited)

Interest Rates

The Governor of the Reserve Bank announced no change yesterday to the Official Cash Rate (OCR). This was not unexpected. Wholesale interest rates are at an historic low, so any further easing is most unlikely. The only real reason to lower interest rates further, would be if our currency appreciates too much. Our currency has been appreciating against all the other main currencies but according to the Reserve Bank, it is still at manageable levels. The comments made by the Reserve Bank yesterday are revealing and informative. They are saying the decline in economic activity is coming to an end and a patchy recovery is underway. They note however that the medium term outlook remains weak. Inflation is not a worry – this is positive for the lower interest rate regime. They expect short term interest rates (especially floating) to remain at their current levels for at least a year. This is a more positive outlook than six or twelve months ago. (source: James Lockie at General Finance Limited)

Do you know anyone who is house-hunting at the moment?

We are finding there there are plenty of people looking to buy but are being told ‘no’ from there bank for multiple reasons. As we deal with multiple lenders, we are often able to turn a ‘no’ in a ‘yes’. Our business success is based on people referring other people to us - if you know of anyone who could benefit from our services, please click here: http://ungaro.co.nz/testimonials/referrals/

Thanks for reading!