Turning rate thinking on its head

All the recent thinking and commentary on what to do with your home loan may be turned on its head after next week’s official cash rate announcement from the Reserve Bank.

Thursday, April 23rd 2009, 2:01PM

by The Landlord

The common view expressed by many commentators since the previous announcement was “fix now before it’s too late”.

The thinking behind this view was a little muddled and in fact drove the market in an unwanted direction. It seems that after two massive OCR cuts of 1.50% each, the last one at just 50 basis points seemed too little (when in fact it was still large by historical measures).

People thought rates were as low as they could go and the call went out to “fix now”. The result was a little contrary as it forced banks to increase their medium and long-term loans significantly, partly as a way of controlling demand.

Added to this, people putting money onto deposits wanted a higher rate of return which too added further upward pressure on rates.

If a bank has to pay depositors more interest for their money then they have to lend it out at higher rates. The latest survey of economists by Good Returns shows that the majority view is the Reserve Bank will again cut its OCR on April by around 50 basis points.

There is no doubt this will drive floating and short-term fixed home loans to levels below their historical lows.

What’s the best deal at the moment?
If you believe that the economy isn’t going to pick up immediately, and that the Reserve Bank will continue to run a loose monetary policy with low interest rates, then using short-term rates is the way to go.

At the moment the further you go out of the yield curve the closer the rates get to their five-year average, this is particularly so for five and seven-year fixed rates.

In this market they don’t look particularly attractive. Don’t be surprised if, now the demand to fix is waning that some of these longer-term rates fall somewhat. Once that happens they will look far more attractive than presently.

What’s on offer at the moment?
The best rates in the market now are six-month terms. Of the five main banks the rate is anywhere from 5.50% (ASB and BNZ) to 5.79%.

These are pretty much the lowest in the market. Your next best rate is one-year fixed. Again there is not much separating the big banks. Indeed ASB is on 5.70% and its competitors are at 5.79%.

Floating and two-year rates are much the same at the moment just below the 6.50% mark, with floating tending to be around 20 basis points lower than the two-year fixed rates.

Out at the long end of the yield curve five-year fixed rates are at the 7.50% mark.

While we have seen lenders adopt some quite different home loan pricing strategies in the past six months, they all are pretty much in line with each other currently. However, don’t bank on that situation changing. There could well be some pricing activity in the lead up to next week’s OCR.

The other factor which may impact rates is that banks start to loosen their lending criteria to grab some of the business currently available in the housing market.

To keep up with changes and the latest trends with home loan rates, click here.

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