Cash rate will push fixed mortgage fees higher
massey-university
Thu Jan 29 2009 13:00:00 GMT+1300 (New Zealand Daylight Time)
Cash rate will push fixed mortgage fees higher
Thursday, 29 January 2009, 12:40 pm
Press Release: Massey University
Thursday, January 29, 2009
Tumbling cash rate will push fixed mortgage break fees higher still
Mortgage holders on fixed rates may still be better off paying break fees now before floating rates tumble further, says Massey University Director of Banking Studies Dr David Tripe.
Dr Tripe (pictured) says this morning's 150 basis point cut in the cash rate by the Reserve Bank should ensure further cuts in floating interest rates offered by banks.
Recent trends in interest rates in wholesale (inter-bank) markets suggest that we will also see lower fixed rates, he says. "In due course, however, we will start to see fixed rates for longer terms higher than for shorter terms, and all fixed rates higher than floating rates. When that starts to happen, it may be an indication that interest rates have stopped falling, and that they might be going to start to rise again."
There are still a lot of customers with home loans on fixed rates, he says, and for those people the decision was whether to pay increasingly large fees required to switch to the floating rate or to a lower fixed rate.
"The lower the floating rate or corresponding shorter term fixed rate drops, the bigger the break fee. However, what the banks have been saying – or should have been saying – is that it may be cheaper to break your fixed rate now than in will be tomorrow, or next month."
What customers had to factor in was the fixed rate they were on and how long it was locked in for to calculate whether the cost of the break fee would be compensated by reduced loan payments.
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Meanwhile, the cut in the official cash rate may not be boost the housing market needs to bring it out of a slump, says Massey’s Professor of Property Bob Hargreaves.
Professor Hargreaves says while the cut to 3.5 per cent is a positive sign, the overall momentum for the housing market is still downward. With unemployment expected to increase during 2009, people were being much more cautious about making financial commitments.
“The cuts will reduce the stress on householders when they renegotiate their mortgages and may encourage more first home buyers to enter the market. However, there are a number of other variables that drive the property market. Banks are generally hoarding cash and not issuing so many new loans. New Zealand banks also rely on large amounts of imported capital and this is expensive. Furthermore, first home buyers are faced with much higher deposit rates given that many banks have increased the minimum deposit to 20 per cent of the purchase price.”
ENDS
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