Longer term home loans may be way to go

Home loan borrowers are being told it may be worth paying a bit extra at the moment for a longerterm fix.

For many years, commentators have advised that the cheapest mortgage rate plan was to roll over a series of one-year fixes. The one-year rates were generally lower than shorter terms and floating rates, but gave enough flexibility to allow borrowers to take lower rates in future if they became available.

But with interest rates rising, and the potential for a 50 basis point increase at the next two official cash rate (OCR) reviews, borrowers face a different outlook.

Mortgage broker Glen McLeod, of Edge Mortgages, said most of the people he dealt with were now fixing for longer terms. A oneyear rate is between 3.79 per cent and 3.99 per cent at the big banks, and a three-year rate is between 4.65 per cent and 4.89 per cent.

‘‘You’re effectively looking at the long-term scenario, you have to do it. We have been locking in two years for most, three or four years for some. Most people see it as sensible even though it is a bit expensive. It does have quite an effect on the repayment.’’

A $500,000 loan at 3.79 per cent is $1191 a fortnight over 25 years. At 4.89 per cent, it becomes $1334.

Reserve Bank data shows there was $12 million of lending in January with more than five years until it came off its fixed term, compared to $8m in December. The amount with between three and four years left to run increased from $4.8 billion in November to $5.8b.

The amount with between six months and a year left dropped from $79b last January to $48.5b this January.

Economists have predicted the official cash rate will peak at anything from 2.75 per cent – ASB’s forecast – to 3.5 per cent (Westpac’s).

ASB economist Chris TennentBrown said retail home loan rates would lift to about 60 basis points to 180 basis points higher than they are at present and most fixed rates would settle in the 5 per cent to 6 per cent range.

He said working out the best strategy for a borrower would depend on a number of factors, such as how much they valued certainty or flexibility.

While the one-year rate was cheaper it provided less protection from near-term interest rate rises.

Two-year rates had more certainty but were still less of a hedge if rates rose more than expected over the next two years. Threeyear rates offered certainty again for a relatively low cost, he said, with protection if rates lifted more than expected.

‘‘It does have quite an effect on the repayment.’’

Glen McLeod

Mortgage broker