New Zealanders have little appetite for longer term mortgage loans to buy residential property in the current economic climate, says a leading researcher at one of the country’ s biggest real estate agencies.
Figures released by the Reserve Bank of New Zealand show that mortgage loans fixed for five years or more account for just 0.02 percent of the $200,154 million of loans currently outstanding.
By comparison floating rate mortgages make up 27.5 percent of loans, while loans with less than one year to maturity make up another 29 percent. Fixed terms of up to two years are the next most popular option comprising 27.8 percent of mortgage loans provided by registered banks.
Bayleys Research manager Ian Little said floating and shorter term fixed mortgage rates had been the most popular options for borrowers since the Global Financial Crisis which led to central banks across the globe lowering interest rates in a bid to stimulate economies.
“In June 2008 when the official cash rate stood at 8.25 percent, only 13 percent of loans were held on floating rates,” he said.
“The announcement earlier this year by TSB of a10-year fixed rate of 5.89 percent gives borrowers another option but given current borrowing trends it is unlikely that it will significantly change borrower behaviour”.
“As Reserve Bank statistics show that for an overwhelming majority of buyers at present shorter term rates are the favoured option. This will continue to be the case over the course of 2015 - given the indications that the Reserve Bank of New Zealand will hold interest rates at their current level, or possibly lower, until 2016.”
Mr Little said New Zealanders’ preference for short to mid-length borrowing terms was in stark contrast to the USA - where the 30-year fixed rate mortgage was very much considered the ‘norm’. Prior to the TSB announcement of its 10-year term, the longest fixed term mortgage offered in New Zealand was the BNZ’s seven-year loan.
“North American home loan mortgage broking house Freddie Mac has some 76 percent of its securities on 30-year terms, with a further 18 percent which are on 15 year fixed rate terms,” Mr Little said.
“That current popularity of the longer term loan is hardly surprising given that buyers in the U.S. are currently able to lock in an interest rate of 3.75 percent.”
Mr Little said the longer mortgage terms offered by BNZ and TSB in New Zealand would most likely be more attractive to investors who had decided to buy and hold property long term as opposed to owner/occupiers.
“Investors tend to take a medium to long term view of their real estate assets. They may see a benefit in locking in a longer term rate to simplify their budgeting,” he said.
“Owner/occupiers on the other hand are more likely to be moving up the housing chain over the course of 10 years, and therefore lean more toward the greater flexibility afforded to them by shorter term agreements.”
Whether, over the course of 10 years, locking in a long-term mortgage rate would result in savings for mortgage-holders compared to those on shorter-term fixed or floating rates would clearly depend on the general interest rate environment, Mr Little said.
Over the course of the last 10 years, the floating rate has been at six percent or below (on average over a quarter) for just 15 of the 40 quarters.
“Depending on the timing of mortgage renewal dates, it would have been possible to benefit from sub-six percent interest rates from the end of 2011 to now,” he said.
Mr Little said the initial extent of uptake onto TSB’s 10 year offer would become apparent when the reserve bank updated its figures later this month.