Beginning of the end for fixed rates?

Is it the beginning of the end for the fixed rate mortgage so beloved of New Zealand home owners?

Thursday, October 2nd 2008, 10:34AM

by Maria Scott

New Zealand’s mortgage market has been dominated by fixed rate lending in recent years because fixed rates have generally been lower than floating rates.

The major development in the home loan market over the last week has been the withdrawal of long-term fixed rates by a number of lenders, followed in the last few days, by the withdrawal of all fixed rates. The move has been led by the funding arm of GE Money, which supplies mortgage finance to a number of New Zealand’s smaller, non-bank lenders.

Mainstream banks are still marketing fixed rates and, indeed, Kiwibank is actively promoting a sub-8%, two-year rate. But forces are at work in the upside-down credit markets that could see longer-term fixed rates eclipsed by much shorter-term fixes or even floating rates.

Commentators and advisers have been recommending shorter-term rates for several weeks and the trend is set to continue even if US legislators agree a rescue package for America’s troubled banking industry.

Nick Tuffley, chief economist at ASB Bank says that an agreement will restore some confidence to global markets, but globally risk premiums are likely to remain elevated for some time to come.  

The trend in New Zealand’s official cash rate (OCR), set by the Reserve Bank, is likely to be the dominant factor in setting market rates here, he believes. The Reserve Bank may cut the OCR – which dominates the pricing of floating and short-term rates – to compensate for the high cost of bank funding in offshore markets.

“From here floating and shorter-term fixed rates will fall further, but there is likely to be far less downward movement in long-term rates if any. Financial markets have already built into long term rates a considerable degree of easing. Also, global risk premiums for long-term money are higher than those for short-term money.”

And, borrowers naturally gravitate to shorter-terms or decide to choose floating rates.   

To check and compare rates, go to our Mortgage Rates table.

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OCR cut to 7.5% »

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