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Two-year rates still a good deal: economist

Monday 17th January 2005

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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 yearís mortgages price war.

Until December 17, BNZís 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 Ė 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." BNZís 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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