Home loan report: On the home straight for cuts?

Home loan rates are, like petrol prices, starting to head down. But like petrol, there is plenty of uncertainty about where prices are going and if they will settle down for a while.

Thursday, August 14th 2008, 6:00AM

Thanks to the Reserve Bank and some competitive pressure amongst lenders, rates have been coming down for the past couple of months. Added to this good news were some recent comments from Reserve Bank governor Alan Bollard.

Following Treasury's latest review of the economy (where it talked about a recession) Dr Bollard made comments which were interpreted as sending a signal to the markets that they should expect a continuing series of interest rate cuts.

These comments pushed rates in the wholesale market down, thus giving lenders room to drop rates. The most high-profile of these is Kiwibank's three-year rate of 8.69%, but it must be noted that this rate has conditions, such as the borrower having at least 20% equity in the loan.

While a full-blown rates war is unlikely soon, borrowers can expect that banks in particular will fight hard to retain business over the coming months as the stakes are high. According to The NZ Mortgage Mag there is around $48 billion worth of home loans coming up for refinance between now and May next year. The bulk of these are loans taken out when the Bank of New Zealand kicked off its Unbeatable campaign.

What's the best deal at the moment?

That's a tricky question as home loan rates are expected to keep falling, but there is no certainty that the trend will continue or where and when they will reach a low point. Indeed at the moment caution levels are higher than normal because of the global credit crisis.

No-one knows how this process will play out over time, but it is clear it has raised the cost of borrowing offshore for lenders.

Added to that the downward pressure is coming from competition and from expectations of lower rates.

Bearing all this in mind, a prudent strategy, which has a good level of general approval, is to fix for a short term of around one year.

Current one-year rates from the main banks are pretty standard at 9.20%, however Bank Direct and Kiwibank are lower at 9.10% and 9.09% respectively.

While one-year is a favoured term, it is not the cheapest fixed term on offer. Rather it is one of the more expensive, with only six-month fixed rates higher.

At present standard two-year fixed rates from the big banks are sitting around the 8.95% market, three, four and five-year rates are around 15 points higher at the 9.10% market.

To keep up-to-date and compare home loan rates, click here.

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