Conflicting rate messages

Home Loan Report: Sometimes it seems pretty clear where markets are at and what sort of strategy borrowers should take with their home loans.

Thursday, August 23rd 2007, 7:01AM

Unfortunately, this is not one of those times.

With so much turmoil in financial markets at the moment there are some very mixed signals being transmitted. Here are some of the things borrowers should be thinking about.

The central view held by economists is that the Reserve Bank won't be cutting its official cash rate until some time next year. However, the caveat to this now, is the credit crunch happening in offshore markets, particularly the United States.

Last week the US's central bank cut its cash rate to ease the crunch which effectively brings rates in that country down.

If New Zealand is hit by this crisis, one possible action is that the OCR will be brought lower. The Reserve Bank took such a move after the terrorist attacks in the US in 2001, so it has shown it is willing to take such action.

While it is something to be aware of, the probability is towards the low end of it actually happening.

One thing the US crisis has done though is cement the view that the Reserve Bank is at the end of its tightening cycle. This means that any future rate increases are likely to be small.

What is worth keeping an eye on is the start of the loosening cycle. History shows that central banks tend to keep rates high for too long, so when the easing starts it is likely to be aggressive.

While that provides some future comfort of borrowers, it doesn't ease the pain people who are refinancing loans are facing. Currently they are likely to be paying rates around 1.10% higher than previously.

The other factor which may come into borrowers' thinking in the next few weeks is what sort of Spring campaigns lenders will run this year.

While there has been little competitive action in home loan pricing for some months, that may change soon.

Traditionally banks run campaigns in Spring and Summer, and it is expected they will do so this year.

What's on offer at the moment? Interest rate comparison site goodreturns.co.nz shows that mainstreet trading banks currently have identical rates on all their standard terms, except with the five year fixed ones.

Floating rates are at 10.55%, one-year rates are 9.40%, two-years fixed are 15 basis points lower at 9.25% and three-year rates are 9.10%.

All the banks are offering sub-9% rates, with some on 8.90% and others five points higher.

Kiwibank, which is arguably the most aggressive of the second tier banks at present, has a floating rate of 9.99% and its two-year rate is 10 points lower than its bigger cousins. Its five-year rate is not competitively priced and right now five-year rates are unattractive sitting at historical highs.

For a full list of what's on offer at the moment click here.

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