Mortgage rates fall, but for how long?

by Maria Scott

During the past week, BNZ has put up variable mortgage rates and selected credit cards by 14 basis points and 100 basis points respectively, reflecting the higher cost of short-term funding. At 10.69% on its Standard and FlyBuys products, BNZ has broken ranks with major competitors who are all charging 10.55%.

BNZ general manager of strategy and marketing Blair Vernon says: "The nature of the market has changed and these rate changes reflect the impact of higher short-term funding costs. The 90 day bill rates are being driven by the combination of a higher Official Cash Rate and market sentiment that suggests it will stay elevated for some time."

Fixed home loan rates have come down by between 10 and 26 basis points at BNZ, and there have been cuts across several terms from a number of other lenders, including ANZ and National Bank today.

The trend started about a fortnight ago with cuts in five-year rates.

But economists say borrowers should not assume that the only way now is down for New Zealand's hard-pressed homeowners and property investors.

The recent reductions do indeed reflect some reductions in the costs of financing on international markets - almost inevitable given the steep cuts in US rates - but it is too early to judge whether this marks the start of sustained falls.

Nick Tuffley, chief economist at ASB says that the markets had already cut wholesale rates on the assumption that US rates would be cut again at the end of January. Whether or not recent declines in New Zealand mortgage rates are sustained will depend in part on the market's reaction to the latest move.

Westpac's market strategist Michael Gordon notes in his latest rates report that New Zealand's two-year swap rate appears to have broken a long running upward trends. It's not surprising, he says to see a wide range of views on where New Zealand interest rates will end up this year. But Gordon notes that inflation remains a concern for the Reserve Bank of New Zealand and that the market is trying to balance growing inflation pressures locally against a slowing global economy.

"In this environment, any dips in swap rates such as we have seen in the last month, are unlikely to be sustained, and should be used as an opportunity to add fixed-rate cover."

Westpac's view is aimed mainly at business borrowers but could be just as relevant to homeowners and property investors who need to raise funds or refinance at present.

Tony Alexander, chief economist at BNZ is also doubtful that rates are on a firm downward path.

In his latest economic update he says: "With regard specifically to fixed interest rates, one might think that with these rates falling relatively strongly in the United States and some other countries, we could see some decent falls here. We think some declines will occur. However, one has to be aware that while in the United States the prime concern of the Federal Reserve and the markets for the moment is the current state of the US economy, at some stage a view will build that the Fed's actions have got things under control. When that happens attention is likely to turn back very firmly to underlying inflationary pressures in the US economy. When that occurs we are likely to see their medium to long-term fixed interest rates rising and this will tend to place upward pressure on our own.

"Picking when this will happen is essentially impossible and probably all this adds up to is the following: If we do see any substantial rally in New Zealand fixed borrowing costs over the next six months, it could be a good opportunity to get on board some greater than normal two to three-year funding, though still leaving some business debt in particular exposed to a likely fall in New Zealand floating borrowing rates over 2009 and 2010. Just don't get optimistic about the magnitude of those falls over that two-year period."

Another factor in the market at present is what appears to be a new bout of competition between lenders. Broker Craig Seton of Mortgage Link Manawatu says that banks have been willing to match benchmark, market leading rates for individual customers, even though they have not been promoting cheap 'carded' rates as aggressively in the past.

Lenders will also pay for ancillary costs, including the low equity fees for higher loan-to-value mortgages. "A couple of years ago these were not negotiable."

"I think lenders are worried because their numbers are down. They are volume driven. These (current) rates are causing people to reconsider buying."

Seton recommends that borrowers be cautious about leaping to take out five-year rates, despite recent falls. Even though shorter-term rates are topping 10%, borrowers should not be panicked into locking into a long-term rate that is likely to turn out to be expensive.

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