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Higher for longer

By Philip Macalister

Tuesday 13th June 2006

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Weekly Home Loan report: Get used to higher home loan rates. Following last week's Reserve Bank announcement they won't be falling until next year.

The big news for home loan borrowers last week was that any cuts are further away than previously expected.

While everyone expected the Reserve Bank to leave its official cash rate at 7.25%, as it did last week, there was surprise expressed at the bank's comments regarding future easings.

RBNZ governor Alan Bollard made it clear that rate cuts won't be starting this year, and he pushed the target out to well into 2007. Previously he had hinted at cuts in the first quarter of 2007, now he is suggesting sometime in the second half of the year. Following his comments bank economists took note and pushed their forecasts out too.

They wiped out the chance of a rate cut in either January or March, which were previously deemed a 50% and 100% chance respectively.

Bollard made it clear he wanted rates to stay up as there was a raft of mortgages coming up for refixing later this year and he wanted borrowers to pay higher rates. Such an outcome means that there will be less money to fuel inflation in the economy.

"The recent rise in rates leaves the bank confident that the average interest rate paid on outstanding mortgage debt - the 'effective' mortgage rate - will continue to rise through the remainder of 2006," the Reserve Bank says in its monetary policy statement. While the central bank's views have the most impact on the short term fixed rates and variable rates, the news for longer-term rates which are set by international markets isn't good.

There is mounting economic pressure pushing these rates higher.

What's the best deal at the moment? This has become a fascinating question as Bank of New Zealand economist Tony Alexander is promoting the three-year fixed rate on the grounds that it is cheaper, on a historical comparison basis than the two-year fixed rate.

However, ANZ has done some research on rates over the past 10 years which shows a number of useful items.

Firstly, the cheapest rate in the market isn't necessarily the best rate.

It says it would have been better to take out three one-year fixed rates as opposed to one, three-year fixed rate in the large majority of instances over the past decade.

While a one-year bank rate is around 8.25% compared to a three-year rate of 7.90%, the idea is that when rates do start falling quickly in a year's time borrowers will be able to refinance at lower costs than today.

ANZ says it has done away with the issue of refixing costs. It is one of the only lenders that no longer charge a refixing cost.

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