Seven year fixed rate attracts attention

By Maria Scott

Brendan O’Donovan, chief economist at Westpac says the market now thinks there is an 87% chance of a rate hike in March. He expects retails sales figures due for release later this week to strengthen the case for action by the Reserve Bank.

Several banks have raised their fixed rates over the past week including National Bank, Bank Direct and TSB. There have been some reductions over the past month, but these have been isolated moves.

BNZ has attracted attention by promoting a seven year fixed rate at 7.77%. One competitor has described this as “madness” because borrowers will be locking themselves into a rate that may be expensive well before the term is up.

Tony Alexander, BNZ’s chief economist argues that this is the cheapest rate on offer and attractive to borrowers concerned about cash flow. At 7.77% the rate is at its average of the last five years.

O’Donovan says that because it is close to the long term average it does not look like particularly cheap funding.

As the outlook for loan rates hardens borrowers who need to refinance may be attracted to the idea of hedging their bets by splitting their mortgages between a range of fixed terms.

The disadvantage may be that borrowers reduce their bargaining power with lenders by seeking finance on several smaller loans rather than one large parcel of debt.