Lowest rate not necessarily best

Home Loan report: The outlook for people wanting to raise money to buy a new home or refinance an existing mortgage isn’t particularly flash at the moment.

Wednesday, July 12th 2006, 10:02PM

Rates have been gradually creeping up over the past couple of months and this trend looks like continuing for some time.

Variable rates haven’t moved since the Reserve Bank last changed its official cash rate back on December 8.These remain high and the margin between floating rates and fixed rates continues to be large.

One of the only reasons to keep some of your loan on a floating rate is to enable you to make extra repayments on your principal without being subject to penalty payments.

One year rates have risen from around 8.20% to 8.40% since January. Over the same time a standard, bank two-year fixed rate has gone from 7.75% to around 8.00%.

Five year rates, which looked relatively cheap on a historical basis around the end of last year are now not so attractive. Recent economic news from offshore markets points to these rates increasing over the short-term too.

The questions which are on the minds of many economists and borrowers is when will rates start falling and how fast will they fall?

The Reserve Bank has made it clear it doesn’t want to see its official cash rate fall until the middle of next year.

Part of the reason behind this is that there are more than $40 billion worth of mortgages coming up for refixing in the last quarter of this year and the bank wants these people to pay higher rates than they are currently on.

By doing this it sucks hundreds of millions of dollars out of consumers’ pockets into debt repayment rather than consumer spending which would be inflationary.

A number of banks are suggesting that the RBNZ will start easing rates earlier than it has signaled – but that isn’t a given.

What’s the best deal at the moment? This has become a fascinating question as one economist 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 provides a number of useful tips.

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

It says you 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.

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