Floating rates growing in popularity

With the Reserve Bank keeping interest rates low more home buyers will move to floating rate mortgages, according to Westpac New Zealand chief executive George Frazis.

Friday, May 6th 2011, 12:00AM

by The Landlord

Westpac is the country's second-biggest lender by assets, and around half of its new mortgages are on floating rates compared to around 40% of existing loans.

Frazis said he believes another 25% will switch next year, and a further 10% after that.

"We've got customers going off historically high fixed rates, then going to lower variable rates," he said.

"That does end up being win-win for both customer and bank - we get improved margins, and there are more reductions in the interest rates customers are paying."

However, in their latest Real Estate Overview, BNZ warned home buyers waiting for signs fixed rates will rise before switching may be taking a risk.

"We believe a substantial number of borrowers are sitting floating waiting until it is apparent fixed interest rates are going to rise and when they believe that point has been reached they will switch to a fixed rate."

"However, when banks lend at a fixed rate they borrow at a fixed rate as well and over short periods of time it is not possible for banks to switch substantial borrowings from floating to fixed," BNZ said.

"What this means is that when the point is reached at which borrowers decide to switch into fixing the fixed interest rates will jump sharply higher almost immediately as banks seek to preserve margins. Therefore, borrowers need to be aware that although borrowing at a floating rate is currently cheap the floating strategy does entail some risk if one plans to fix."

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