Rate cut good news
Thursday, April 30th 2009, 11:35PM 
2 Comments
The official cash rate cut is good news for borrowers. What’s more the announcement from the Reserve Bank gives home owners and property investors a clear idea of the best borrowing strategy.
The Reserve Bank, on Thursday, lowered the OCR 50 basis points to 2.5%, the lowest the rate has been since it was introduced in March 1999. It has fallen dramatically over the past year, from historical heights of 8.25%, where it sat for 12 months from July 2007, to July 2008 when Bollard’s vigorous cutting cycle began.
The key messages for borrowers to take out of the latest cut is that the rate is likely to stay at current levels until at least the end of 2010 and may even drop further before then, and that floating and short-term fixed rates are the best option at present.
"We expect to keep the OCR at or below the current level through until the later part of 2010,” Reserve Bank governor Alan Bollard said.
Since the previous OCR cut on March 12, many borrowers rushed to fix for three, four and five years in the fear long-term rates had already bottomed out. This will prove to be not such a good strategy.
It was an odd-move by many as long-term rates had risen to be near historical averages and that picture didn’t fit into the current lower rate environment.
At some stage, maybe quite soon, these rates are likely to fall.
On paper fixing for the long term may have looked attractive, but in reality it will prove to be the wrong move.
Bollard reinforced the best option for borrowers this morning, which is rolling over on six-month terms.
After a couple of weeks with no rate movement from the main banks, don’t be surprised if the banks become more aggressive, as the economy shows signs of stabilising and a push for an increase in lending begins.
Following this train of thought, banks will also have to loosen lending criteria if the level of lending is to go up.
The main banks’ current short-term rates are nearly half of what they were this time last year. Floating rates range from 5.99% with Kiwibank, to 6.49% at Westpac.
Six-month rates currently range from 5.39% at Westpac, to 5.70% at Kiwibank and ANZ/National. One-year rates are also currently well below 6%.
Since the OCR announcement the only bank to move rates is Westpac. It has cut its six-month rate 40 points to 5.39%.
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Comments from our readers
On 8 May 2009 at 1:28 pm Hamish said:
Just a thought what if I listened to a person's advise and went on floating for a couple of years. And what if the long term fixed rates jumped up towards the end of the first year. Like really jumped up, to like double digits. Would it have been a wise strategy? The problem is when one decides that they some how know what might happen in the future.
We all know that even with a masters degree your chances of predicting the future is still similar to that of a gypsy.
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It was an odd-move by many as long-term rates had risen to be near historical averages and that picture didn’t fit into the current lower rate environment."
Are you sure about this? 5 year fixed rates are already rising - I wish I had fixed last month. I hope I am wrong as my 3 year home loan ends this year. What likelihood is there that the 5 year is likely to come down? Tony Alexander's latest weekly report indicates that this is unlikely and best to fix short term.