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Two year fixed rates best home loan option

Monday 5th July 2004

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Economists currently think short-term wholesale interest rates, and therefore floating mortgage rates, are heading higher, especially since the New Zealand economy has been growing faster than expected and global growth is picking up.

Anthony Byett, chief economist at ASB Bank, reckons variable home loan rates will probably reach between 8.5% and 9% within the next 12 months.

ASB and three of the other four major home lenders currently charge 8% on their floating mortgage rate while Westpac is charging 8.1%.

Bank of New Zealand chief economist Tony Alexander says the Reserve Bank’s Official Cash rate (OCR) could peak at 6.25% "with a risk of something a tad higher.

But that’s the easy bit. The majority of home lending in New Zealand is on a fixed-rate basis.

With longer-term rates more influenced by what’s happening to interest rates globally and particularly in the US, last week’s move by the US Federal Reserve to raise rates for the first time in four years seems to imply longer term rates will also move higher.

Alexander’s advice to borrowers is that fixing for two years currently is the best option.

Byett agrees that fixing for between two and three years offers the best deal currently. He notes that the two-year fixed rate is currently close to the average variable rate between 1999 and 2003 and that the three-year rate is only slightly higher.

But as a warning to take all such predictions with a grain of salt, Alexander reminds us that over the past five years every time the Reserve Bank has tried to raise rates to slow growth, major international events occurred to force the central bank to cut rates again relatively quickly. These events included the September 1, 2001 terrorist attacks on New York and Washington, worries about the SARS virus, the Iraq War, drought and electricity crises.

To see compare all home loan rates go to Mortgage Rates Page

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