Difficult mortgage decisions for borrowers likely to continue - CoreLogic

Wednesday, 9 October 2024

To go short or long is a difficult decision for mortgage holders these days and it’s likely not going to get easier.

According to CoregLogic, data points to a strong preference for short-term loans.

CoreLogic chief property economist Kelvin Davidson said at macro level this means any reduction in rates will flow through to balance sheets quickly, but there were also risks to watch for in terms of rising loan repayment problems thanks to a weakening labour market.

And with the looming OCR review decision on Wednesday afternoon, where it’s likely to be cut but by how much is still up for debate, people were opting for short-term loans more often.

In December last year 36% of new loans were taken out for a fixed term of up to 12 months. That had spiked to 56% by February and reached a new record high of 68% in August as banks lowered their interest rates following the OCR cut.

Davidson said CoreLogic analysis showed that existing borrowers who are rolling over their loans onto a new fixed rate will have been behaving in a very similar way to new borrowers, and indeed the Reserve Bank’s figures show that the share of existing loans that are currently fixed but due to change mortgage rates within the next 12 months has now risen back to around 66% – matching a peak previously seen in the first half of 2021.

But was it the best decision to go short?

“In hindsight, it might not have been the best decision for borrowers – in aggregate - to fix for such short periods back in mid-2021,” Davidson said.

“Indeed, anybody who bucked the trend and took out a five-year rate of around 3% at that time will still have about 18 months to run at those ultra-low rates.

“On the other hand, one can understand why borrowers are now choosing to take shorter fixed periods in the hope they will benefit from a series of loan renewals in the coming year or two at ever-lower rates.”

But whether the move pays off for mortgage holders was a waiting a game.

“Nothing’s out of the question, especially given the continued weakness of the economy and an emerging risk that inflation falls much more sharply than has been anticipated; which would likely see the OCR also fall more rapidly, alongside extra downward pressure on mortgage rates.

But at the same time, there could also be a sense that some of the potential future falls in the OCR have already been captured by current mortgage rates, meaning that the declines in mortgage rates could be smaller and slower than what we’ve seen so far, Davidson said.

“Either way, the delicate decisions currently faced by mortgage borrowers may continue for a while yet.”

The declining labour market was also a worry.

“Even though interest rates are now falling, it doesn’t necessarily mean we’ve passed the worst for financial stress amongst mortgage borrowers.

“Mortgage stress will remain a factor to watch for some time to come year and is another reason to be cautious about the size and strength of any upturn in house sales and prices as we head into 2025.”