Kiwi homeowners are playing a risky game with their mortgages

Kiwi  property owners are making a collective bet against the banks — and experts say it could cost them big time.

Most borrowers are choosing short-term mortgage fixes over better long-term rates, potentially leaving thousands of dollars on the table. Financial FOMO or strategic brilliance?

Short-term addiction

New data shows that a whopping 90% of borrowers who refixed their mortgages in January opted for short-term rates instead of locking in the sub-5% long-term deals major banks were offering.

That’s a bit like turning down a sure thing at the poker table to draw another card.

Andrew Chambers, CEO of Tella home loans, calls this trend scary. “At the moment, two months of sitting on a floating rate is probably a similar cost to fixing for one year. The shorter the rate, the higher the cost at the moment.”

What it means for your wallet

Here’s the scenario:

  • Best floating rate: 6.45%
  • Best six-month rate (major bank): 5.79%
  • Best two-year rate: 4.99%

On a typical mortgage, that’s about $7,400 more per year if you’re floating versus a two-year fixed rate. Even the difference between a six-month and two-year rate will set you back around $3,200 annually. Not just latte money – that’s a decent holiday or a significant chunk of your property maintenance budget vanishing into the banking ether.

So why are Kiwi borrowers making this seemingly irrational choice?

They’re betting rates will drop further. But Chambers calls this “banking on stuff” that homeowners have zero control over. And the global picture isn’t exactly screaming “lower rates ahead”. The NZ dollar is strengthening against the USD, which increases inflationary pressure.

Play the long game

A reality check for property investors: your mortgage isn’t a short-term fling — it’s a 20+ year commitment. As Chambers puts it: “I always say that if you put it on a one-year fixed rate for the entire term of the loan, you probably come out as good as those trying to play the market.”

CoreLogic’s chief economist Kelvin Davidson points out that about 71% of existing NZ mortgages by value are currently fixed but due for repricing soon, with another 12% floating.

After years of repricing events meaning higher rates for borrowers, the tables have turned. With “rate wars” brewing among lenders offering lower two to three-year fixed rates, we could see a shift back toward longer-term fixing.

What’s the smartest play?

While mortgage micro-management might feel like you’re taking control, the numbers suggest otherwise. The spread between short and long-term rates right now makes longer fixes look like the smarter play for most investors looking for certainty in their cash flow projections.

Plus, there’s good news on the horizon: banks have dropped their servicing rates for assessing home loans from 9% at the peak of the rate cycle to about 7.3%, meaning investors can potentially borrow more against their income.

What’s your take on the current mortgage environment? Going short or locking in long-term? Hit reply and let us know your strategy – we might feature your approach in next month’s newsletter.