Rate falls an illusion

Home loan rates have been rising steadily this year, driven primarily by the three increases Reserve Bank governor Alan Bollard has made to the official cash rate (OCR). This has pushed floating rates to levels not seen for many years and fixed term rates are truly expensive compared to just a year ago.

The five-year fixed rate, which looks the cheapest option at present, is actually at levels not seen since before the current housing boom started.

However, astute market watchers will have seen that two and three year fixed rates have been falling gradually over recent weeks. This may look like we have reached the summit of this interest rate cycle, but that's not necessarily true.

Economists debate whether there will, or won't, be another hike in the OCR. Views are mixed but generally in the affirmative. All eyes now are firmly on Bollard's next rate review which is due on Thursday next week.

Earlier this week economic news in the form of a surprisingly high inflation figure for the June quarter add weight to the view that there is at least one more OCR increase to come.

If that is true the question for borrowers is when will the cuts start to eventuate? On this front experts are united in their opinion: Not for a long time. Indeed some suggest that rates won't start falling until well into next year.

That means people taking out a home loan or wanting to refinance an existing borrowing are best advised to go for a rate of around two years and, fingers crossed, hope that the picture will be much better at the next refinance point in 2009.

The small falls we are seeing in medium-term rates is due to offshore forces. The only good bit of news for borrowers is that economic developments in the United States may see these rates gradually fall over the medium term.

It seems there is little willingness amongst the lenders to reduce rates through competition.

Current standard mainstreet bank rates, according to interest rate website www.goodreturns.co.nz, show floating rates are at 10.30%, one year rates are a full 100 basis points lower at 9.30%, two-year rates, the most popular term, sit at 9.25% and five-year rates are between 8.90% and 8.95%.

Many non-bank lenders have a range of rate options. To check and compare the latest rates go to the Home Loan section of Landlords.co.nz.