Floating rates rise while fixed rates tumble

Lenders have rapidly followed the lead of ASB, increasing floating and six-month mortgage rates while cutting longer term fixed rates after the last Official Cash Rate (OCR) increase at the end of last month.

Tuesday, August 10th 2010, 4:08PM

by Jenha White

The OCR was increased by 25 basis points to 3.00% at its last review and since last Thursday 10 lenders (ASB, Sovereign, NZ Home Loans, Silver Fern Mortgages, Credit Union Baywide, NZF, TSB, ANZ, Westpac and Kiwibank) have increased their floating rates by 25 basis points (bps) with most making the same increase to six-month rates.

The floating rate median for the major banks is now 6.24% and the six-month median is 6.20%.

These lenders also dropped two-year rates from between 10 and 35bps and three-year rates by between five to 65bps. The median rates for these terms for the major banks are now 6.92% and 7.23% respectively.

Four of those same lenders cut five-year rates as well, most by five or 10 basis points and Silver Fern Mortgages by a substantial 80bps and six of those lenders cut four year rates, most by 10bps.

ANZ Market Focus says it is keeping a close eye on the mortgage curve as lenders continue to follow suit.

It says the mortgage curve is still upward sloping so households by-and-large are still incentivized to borrow short.

"But with a 60 basis point "spread" now between the floating rate and the two year fixed rate, the latter is starting to look attractive," ANZ says.

BNZ economist Tony Alexander shares the same outlook in the BNZ Weekly Overview.

He says the gap between floating and fixed rates is falling but the gap still exists and that means the expressed reluctance of borrowers to jump into a higher rate straight away in order to fix is likely to keep most people sitting on floating.

"For myself, I would still hop off floating into a two or three-year fixed rate."

ANZ says the last thing the Reserve Bank probably wants at present is a dilution of the OCR's effectiveness which will occur if everyone is insulated by taking a two-year mortgage.

"We suspect this will not be lost on the Reserve Bank and it may reinforce its belligerent stance for fear of the curve working against them otherwise."

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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