No Xmas cheer for borrowers

There is not much cheer to be had if you are shopping for a homeloan in the run-up to Christmas 2007. The Good Returns mortgage rate table is sprinkled with red but this is not festive flourish. Rates are rising again and two-year fixes, in particular, are under pressure.

Thursday, December 20th 2007, 6:00AM

by Maria Scott

Floating rate loans broke the 10% barrier some time ago but now the cost of two-year money from some lenders is heading in that direction. GEM Home Loans has recently posted a rate of 10.15% on two-year finance and Pioneer-Swift 9.95%. Rates at 10%-plus are already commonplace across all terms for higher risk loans.

Economists at the major banks are recommending two-year fixes at present in the expectation that borrowing costs generally will finally be falling at the end of a 24-month rate secured now. They continue to believe that the scope for significant reductions in rates before then is limited, making floating and shorter-term fixes a higher risk proposition.

The cheapest two-year rate posted on Good Returns now is at 8.99% from NZ Mortgage Funds, following by 9.05% from Silver Fern and 9.15% from AMP on loans of $200,000-plus. But borrowers shopping for finance now might be well advised to keep a close eye out for re-pricing at the cheaper end of the rankings, given that the general trend seems to be upwards again.

Rates have increased even though the Reserve Bank held the Official Cash Rate at 8.25% when it conducted its final rate review of 2007 at the beginning of December. But Reserve Bank governor Alan Bollard's warning that borrowing costs in New Zealand may have to stay higher for longer than anticipated is now likely to have been absorbed by the financial markets, influencing wholesale funding costs for lenders.

There are also continued signals that inflation will remain a concern for the central bank here in coming months, not least the news of further increases in earnings by the dairy industry. Economists at Westpac believe that rates in New Zealand may not begin to fall until mid-2009 and that mortgage costs may not be significantly lower than current levels until 2010.

Last week, central banks in North America and Europe agreed to increase funding to their major banks in an effort to alleviate the credit crisis that is threatening their economies. Economists here say that if it works, the central banks' unprecedented intervention could have an impact on borrowing costs for New Zealand institutions raising funds internationally, but borrowers should not bank on lower loans costs here for some time unless conditions in major overseas economies deteriorate sharply or house prices here fall sharply.

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