Falls and rises in home loan rates

Next week’s official cash rate announcement from the Reserve Bank is expected to bring more good news to borrowers.

Wednesday, March 4th 2009, 5:06AM

Economists are unanimous that the central bank will again cut its cash rate, with some expecting the decline to be much as 100 basis points. Governor Alan Bollard cut the rate from 5% to 3.5% in late January and the OCR could get close to 2% in this easing cycle.

A recent survey of 11 economists done by Good Returns showed that four are now expecting a 50 basis point cut, three a 75 point cut and four a 100 point cut to 2.50%.

This is bound to drive short-term rates down further. Good Returns predicts that all the banks will have standard short-term rates below the 5% mark, either before the announcement or soon afterwards.

One bank, BNZ, has already rolled out a six-month rate of 4.99%, but it can’t be called a standard rate as it has many conditions attached to it. The first is that the mortgage can’t have a loan to valuation ratio of more than 80%. This has been a common feature of many of the “hot offers” recently.

However, BNZ also included conditions such as customers had to buy another two products from the bank to get this rate.

So while it is seen as a market leader, it is an unusual offer.

We are expecting banks to be reasonably aggressive in cutting short-term rates as their margins in this area are currently relatively fat.

However, the same can’t be said for longer-term rates. In the past couple of weeks a number of lenders have increased rates for terms of four and five years. These rates are now above the 6% mark and could well rise further.

The difficulty in predicting what may happen here is that these rates are priced off what is happening in offshore markets and these have been very volatile. Saying they are uncertain times is really just an understatement.

If there is one good thing to say about these rates, it is that they are still near historically low levels, especially when considering where they were a year ago.

Perhaps the biggest issue at the moment for borrowers is the banks’ tight lending criteria. There has been much written about how difficult it is to get banks to approve loans.

This shouldn’t be taken to mean that banks aren’t lending, period. Indeed banks are willing to finance deals as long as the lender has good equity and there aren’t problems with debt servicing.

Another feature of the current market is that previously banks tended to have very similar carded rates for loans. We are now seeing some decent ranges in rates for shorter-term rates, while the longer ones are reasonably consistent.

Four and five-year rates from the big banks sit around the 6.40% and 6.50% mark respectively.

At the other end we have bank floating rates from 5.99% up to 6.99%. Similarly, six-month rates go from BNZ’s special 4.99% rate up to 6.09% (co-incidentally another BNZ product).

Two key messages for borrowers are shop around for the best rate and also seek some professional advice on how to structure your loan.

To check and compare rates in the Mortgage Centre, click here.

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