Message in a bottle

Thursday, August 13th 2009, 4:48PM

The trend and the message in the changes to home loan rates in the past week have been clear and a little worrisome for borrowers.

As reported rates for terms of 18 months or more have risen, and the rises for three and four-year money have been steep. In many cases more than 50 basis points.

Shorter dated money rates have generally stayed static, however market leader Kiwibank and one of the building societies have cut their floating rates in the past week. (BNZ also made a cut to one of its loan products, Total Money, however Total Money is part of a product which includes some other elements. For this reason I don’t include it as a “standard” rate).

To see how the interest rate curve has steepened check out this graph showing Kiwibank’s new rates versus its earlier ones.

The worry is that short-term rates, while attractively low, aren’t going to stay around these levels forever. At some point they will start rising and when you look at the height of medium and short-term rates these increases could be a significant whack.

Borrowers who currently have their home loans of maturities from floating out to one year, will need to be watching what’s happening closely and reviewing their strategy.

One option to consider is leaping in and fixing some of your loan for a longer term – unfortunately the time to do that has, arguably, passed. While the three-year fixed rate is just below its average for the past five years, longer durations are now above their five-year average.

We will be watching these longer-term rates with interest to see if they have gotten too high. They have increased, mainly, because there are growing signs of economic recovery in offshore markets – particularly the United States.

However, there is no guarantee this pick-up will be a long-term constant trend. Indeed, many economists expect there to be hiccups to the economic recovery along the way. When these come there is a chance funding costs for home loans will drop back.

If this happens they may only be temporary and will give you small windows of opportunity to fix.

However, I wouldn’t bank on it as a strategy.

« SBS raises rates: Will others follow?

Bank continues unusual behaviour »

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