Bank loan funding costs at 10 year peak
The Good Returns mortgage rate table is awash with red this week as lenders push rates up even though there has been no change in the official cost of borrowing in New Zealand.
Wednesday, November 7th 2007, 9:42PM
by Maria Scott
These changes have been prompted by the rising cost of finance in international wholesale money markets and also by signs of strength in the New Zealand economy that indicate that our OCR remains under pressure.
The problem in international markets is the still-unfolding credit crisis sparked by defaults on sub-prime lending in the United States. Fresh revelations of multi-billion dollar losses among leading US banks have raised new uncertainties about the depth of the crisis and its potential to unsettle economies.
Borrowers in New Zealand are paying the price as banks see their funding costs rise.
Bank funding costs have increased to their highest levels in a decade.
There has been a hardening in five year funding costs which is an indicator that financial markets are pessimistic about the cost of funding for some years to come.
Rates here are also being influenced by the possibility that the Reserve Bank may have to raise the OCR from its present level of 8.25%.
A 30 basis point rise in borrowing costs adds $300 a year to the interest bill on $100,000 of borrowing, or just under $5.80 a week. That may not sound much but borrowers who are refinancing from maturing two-year fixed rates are seeing costs go up from under 7% to more than 9%. That's about $2000 a year, or more; just under $38.50 a week.
Several lenders are now charging 9%-plus for five year money.
At that level, locking in for five years does not seem an attractive proposition. However, borrowers who chose the popular two-year terms two years ago are emerging into a market where rates have remained much higher for longer than expected.
There is a chink of light; the higher cost of fixed term mortgages that are being implemented independently of an OCR change will take spending power out of the economy. This may help to take the pressure off inflation, and domestic borrowing costs. Overseas, official rates have already fallen sharply and there is talk of rate cuts in the UK, as its economy shows signs that it is being hit by fall-out from the credit crunch. But it will take time for these factors to have an impact on wholesale rates and financing costs in New Zealand.
Meanwhile, brokers and economists still favour two year deals on the basis of flexibility and the assumption that rates really will begin to weaken within that period.
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