Debate continues over long-term fixing

By Maria Scott

ANZ and Westpac both announced 25 point increases to their floating rates within 24 hours. Both banks now charge 9.8% for floating rate mortgages.

National Bank matched them soon afterwards, and Kiwibank added 25 basis points to its floating rate, taking it to 9.25%. Wizard and SBS also added 25 points to their floating rates. Kiwibank also increased all but its 2-year fixed rate by 10 points although BNZ dropped its Classic 2-year rate by 8 basis points to 8.09%. Many non-bank lenders have also increased their floating rates by 25 points.

Economists are predicting that relief may be some way off for borrowers and some suggest that longer-term fixed rates look increasingly attractive.

Commonwealth Bank of Australia economist Chris Tennent-Brown says: “At this stage we do not anticipate significant falls in rates for a long time The five-year mortgage rate was generally the lowest rate on offer in 2006, and this looks set to continue for 2007. So for many, ‘lowest is best’, and a five-year term is the rate they should choose.”

He cautions, however, that there are penalties for breaking fixed term.

Bank of New Zealand chief economist Tony Alexander says “there will essentially be no scope for any sizeable cuts in interest rates for a substantial period of time.”

Scope may be limited for any significant fall in short term interest rates in a year or two.

“For those with average size mortgages and an ability to handle some cash flow fluctuations fixing for two years is probably optimal. Personally however with a decreasing belief that there is substantial scope for sizeable interest rate reductions in the next couple of years I would be inclined toward a seven-year rate at 7.77%.”

However, the choice of a long-term fixed rate remains controversial.

Mark Bouris, chairman of Wizard Home Loans told Good Returns that there could be as much risk for a borrower in taking a five year loan as a variable one.

“Everyone is chasing the five year fixed rate. A good five year fixed rate means you don’t believe the (general) rate will change over five years. You would have to say there is probably every chance there will be a reduction in five years. There is a lot of analysis to show that it’s of marginal benefit to fix over five years.”