Two-year rates still a good deal: economist

Monday 17th January 2005

Bank of New Zealand chief economist Tony Alexander is still recommending that borrowers fix for two years, even though this rate has jumped since his bank called a halt to last year�s mortgages price war.

Until December 17, BNZ�s two-year fixed rate mortgages were just 6.9%, but they are now 7.6%.

"When the two-year rate was at 6.9%, it was a complete gimmee and practically everyone should have jumped in and grabbed it � many did, we can pleasingly say," Alexander says.

With the floating rate currently at 8.75%, where it may remain for the rest of this year, it would have to average 6.5% during 2006 to bring the two-year average down to 7.6%, he says.

"We would forsake fixing one year in favour of fixing two years." BNZ�s one-year fixed rate is currently 7.6% too, as is its three-year fixed rate.

Alexander says fixing for three years is likely to be a better deal than floating for that period. "If the floating rate ends up at the usual low point in its cycle of 6.5% come the end of 2007 (and the balance of probabilities says the rate will actually be higher), then it will have averaged about 7.9% over the coming three years."

Chosing whether to fix for two or three years is a bit of a coin flipping decision, particularly as any easing in interest rates during 2006 may not amount to much, he says. "This means naturally risk-averse people should consider fixing three years or longer while for those with lower debt levels prepared to take some risk, the two-year fixed term could be optimal."

Alexander expects fixed rates will rise over 2005.

To compare all the home loan rates go to Good Returns .

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