Home loan report: Fragile market

Mortgage rates are still moving generally in the right direction for borrowers as lenders continue to react to the quarter point cut in the official cash rate at the end of July.

Wednesday, August 6th 2008, 4:55PM

by Maria Scott

There have been some increases, confirming the volatility of the market, but these have been outweighed by reductions.

Tony Alexander, chief economist at the Bank of New Zealand noted in his economic briefing a week after the OCR cut that lenders had implemented cuts of 0.25% to 0.2% in two-year rates even though "us economists" had predicted that mortgage rates would not fully reflect the cut in the OCR. "This is what competition for market share is all about and long may it continue," said Alexander.

The OCR cut was neatly timed to start delivering relief just ahead of the spring house-buying season, even though this will be a shadow of its usual self this year. Banks also have plenty to play for in the refinancing market with nearly $50 billion of mortgages due for re-fixing before May next year.

While much of the mortgage-cutting action has been concentrated on the two-year terms – nearly 40% of two year listings in the Good Returns mortgage table are now under 9% – this is not the term favoured by bank economists.

They are mainly recommending one-year terms or shorter even though rates on these are higher than over two years and mortgage brokers agree. The assumption is that by fixing for a shorter term, better rates will be available when they are ready to refinance.

David Tillman, a Christchurch based broker with the Mortgage Link group says he is comfortable recommending one-year fixes but that if clients are uncertain he will suggest splitting the loan over different terms; he has just arranged a mortgage for a client where part was fixed over one year and part over 18 months.

Auckland broker Bruce Patten, of Loan Market favours six month fixes or even floating rates but says much depends on a client's circumstances: "If clients are struggling and can't afford the risk then a longer term is warranted, so every situation is different.

Christchurch-based Rob Parsons, of Mortgage First NZ is recommending six month and one-year terms. "In some cases 18 months, but generally no longer unless the clients are very risk averse, in which case they may feel more comfortable knowing precisely what their loan commitment will be for the next few years. However, most clients are reasonably comfortable that rates are going to fall, and are therefore happy to fix short term.

"Some are even 'riding shot gun' and staying on variable rate for the very short term, anticipating/hoping for more falls before they commit to fixing."

All of the brokers report that banks are still willing to negotiate over rates although Tillman does not think they are discounting as aggressively as they were last year.

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