Rates up, up and away

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Mortgage rates are continuing to rise. Even over five year-terms, rates from some lenders are now priced at well over 10%.

Wednesday, March 26th 2008, 2:39PM

by The Landlord

Pioneer Mortgage Services has just put its five-year rate up to 10.8%, where it is the highest in the market over this term. General manager Robert Redford said that this was a result of an increase in the cost of funding from one of Pioneer’s funder, AMS, part of the GE Money group. Redford predicted that other lenders financed by AMS – of which there are several in New Zealand – would have to follow suit.

Major banks are still charging well under 10% for five-year money but Redford said they may also have to catch up eventually.

Five-year fixed terms are among the least popular with borrowers and advisers although ANZ has recently suggested that having a portion of borrowing fixed over five years, with two-year terms taking precedence, would provide borrowers with a hedge against continued high rates.

There is an emerging view among economists that New Zealand’s official rate could drop swiftly from later this year – ANZ is predicting cuts from the September quarter, because the economy may slow sharply, but that rates will not drop to the low levels that were seen at the bottom of the last rate cycle. Worldwide, they say, inflation will remain a problem as economies struggle with the high cost of commodities and resources. New Zealand is no exception.

Tony Alexander, chief economist at BNZ describes inflation risks as “omnipresent” and predicts that when the Official Cash Rate begins to fall in New Zealand it may bottom out near 6.5% rather than previous lows near 4.5%. ASB says that short-term interest rates here will gradually decline to a point where they around 1% lower in 18 months’ time, but that at this level will still be well above average.

The overall message to borrowers is that we are entering a new economic phase where the cheap financing costs of recent years will be a sweet but distant memory.

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