- Borrowers are urged to lock in three-year mortgages for certainty, says economist Tony Alexander.
- Two-year terms are most popular, but Alexander warns of risks with shorter fixes.
- ANZ increased mortgage rates by 20 basis points, with two-year rates at 5.49%.
Borrowers are being urged to lock in their mortgages for three years, with a leading economist saying certainty is worth paying for.
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Independent economist Tony Alexander says now is not the time to gamble on where interest rates are heading.
“The risk is that at some stage in the next two years, people will be possibly shocked by what happens with interest rates, and then they could panic and make a mistake, so personally I would fix for three years,” Alexander said.
Borrowers are increasingly fixing for longer, but Alexander believes many are still underestimating the risks further down the track.
Latest Reserve Bank data shows two-year mortgage terms are now the most popular choice, overtaking one-year fixes.
Two-year terms accounted for almost a third of new lending in April.
“We know that many people are taking out longer fixes now to avoid the risk of even higher mortgage rates later,” CoreLogic chief property economist Kelvin Davidson says.
However, most borrowers are stopping short of the three-year term Alexander favours.
Twice as much new lending went on two-year fixes as three-year terms in April.
The data comes as the country's biggest lender, ANZ, hiked all but one of its mortgage rates by 20 basis points.
The New Zealand Herald reported that ANZ’s new rates start at 4.69% for its six-month “special” and go up to 6.49% for mortgages on five-year terms, with its popular “special” two-year rate at 5.49%.
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The Herald reported that ANZ mortgage rates were about 20bps above most of its competitors.
Alexander says two-year fixes are often about 0.2 percent cheaper than three-year terms.
Borrowers are balancing the lower cost of a two-year fix against the added certainty of fixing for longer.
The difference can add up on a larger mortgage, which may explain why many borrowers are stopping at two years.
Alexander says fixing for longer could help shield borrowers if interest rates climb faster than expected.
It's not the first time Alexander has backed longer-term fixes. He urged borrowers to lock in five-year mortgage rates before interest rates surged.
“For those who fixed for five years at 2.99 per cent in 2020 and 2021, the rise in one-year rates to 7.35 per cent by early 2024 was largely irrelevant,” he previously said.
Alexander says nobody knows where interest rates will be in two or three years' time, which is why he believes certainty is worth paying for.
The Reserve Bank's split decision at its OCR review last month, with policymakers divided over whether rates should rise, only reinforced his concerns.
Alexander says the disagreement highlighted the uncertainty surrounding the inflation outlook.
“That plays into my belief that their tendency to tighten too late, then tighten too much, then loosen too late, loosen too much is probably going to continue,” he said.
Higher oil prices linked to conflict in the Middle East could add to inflation pressures by pushing up the cost of fuel, freight, and goods.
Alexander also believes price pressures could build again if lower mortgage rates put more money in people's pockets.
He says the Reserve Bank has already cut rates too aggressively and is underestimating the risk that inflation could flare up again.
“They should never have taken the Official Cash Rate last year down to 2.25 per cent. Three per cent might have been reasonable,” he says.
“There is an inflation risk in the New Zealand economy, and I don't yet think the Reserve Bank has truly woken up to that."
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