12 Jul 2013

Mortgage holders face difficult decisions - economist

7:00 am on 12 July 2013

With longer-term mortgage rates now rising, but shorter term rates still very low, people taking out new mortgages or rolling off fixed rates have some difficult decisions to make.

Bank of New Zealand chief economist Tony Alexander says mortgage rates will inevitably rise but the question is when.

He says there is still considerable uncertainty about the pace at which interest rates are going to go up, but the direction is upwards because of factors in the United States and growth in the New Zealand economy.

Mr Alexander said for most people it will be some mixture of floating, short-term rates out to two years and then having some, perhaps even half, of their mortgage fixed in the three to five year period.

But Mr Alexander has a warning for people who believe they have to stick to short-term mortgages because they can't afford to take out longer-term fixed mortgages.

"If you are being forced to borrow at a floating rate because otherwise you find you can't afford it, you probably cannot afford to buy a house because once the interest rates go up you could be in a very perilous position."

Mr Alexander said he would advise all borrowers who are buying in the next year or two to consider what position they would be in if their interest rate went to 8 or 8.5% because conceivably interest rates could be at that level in maybe three years time.