Falling rates maybe short-lived

As we reported in the previous Mortgage Rate Report the spring battle between banks for market share started more strongly than many expected.

As usual Bank of New Zealand started it, and a number of other banks, noticeably Westpac and ASB were quick to get in on the action.

It now looks like the cut in rates, particularly the two year fixed rate, came while wholesale rates were rising. Fears have emerged this week that the Reserve Bank may indeed put up its official cash rate when it is next reviewed on October 26.

ANZ economists were first to flag this in a report this week. They said: “We still expect the easing cycle from the Reserve Bank to begin from June 2007 but now recognise the explicit risk of a hike in October as a late cycle insurance policy.”

Factors behind this view area falling petrol prices, increased business confidence and the mortgage rate decreases. All these lead to increased economic activity.

In the past week there have been few cuts from the banks, rather the trend has been the opposite. ANZ put up its five year rate and Westpac followed. Sovereign has done the same today and it therefore likely that ASB and Bank Direct will follow suit.

We commented in the previous reported last time that Westpac was being a protagonist in the rate war this time around, and that customers with loans of more than $150,000 could get additional savings by using its Redpac product which had even lower rates than those for the standard home loan.

However, Westpac has withdrawn Redpac from the market, but it still honours the product for existing customers.

There has been very little change in bank rates during the past week, the only significant trend, as commented on above is that five-year rates have crept up, therefore the difference between these rates and some of the shorter term ones is less pronounced.

ANZ economists comment that there is huge discounting pressure in the five-year rate.

“(Banks are) discounting particularly at the five year end to try and capture market share from the swathe of fixed mortgages coming up for renewal.”

It says the margin in this area is tiny, with the gap between the five year mortgage rate and five year swap rate down to around 40 basis points.

Outside two and five year rates all the banks have identical rates. As has been the case for some time the longer the term the lower the rates. Six-month bank rates are at 8.40%, three-years are at 7.90% and five-year rates are moving from last week’s 7.50% up to 7.70%.

Two year, standard bank rates range from BNZ’s 7.95% up to 7.99%.

For a full, sortable table of rates go to Landlords Mortgage Centre.