Home loan report: Rollercoaster rates

New Zealand’s annual inflation rate, measured by the Consumer Price Index for the year to June was 4%, higher than economists had been expecting. The rise for the June quarter was 1.6%, also higher than expected. The inflation statistics cast some doubt over whether the Reserve Bank will opt to cut the official cash rate (OCR) from 8.25% at its review next week. There have been increasing expectations among commentators, and hopes among businesses, that the rate would be cut in July rather than at the next review in September. There is no clear consensus yet among economists about how early the Reserve Bank will move, although most are saying that it will be a close call next week as the bank struggles to weigh the risks of rising inflation against an extremely subdued economy.     

Expectations about the OCR influence the cost of wholesale funding for mortgages in New Zealand, particularly the shorter-term fixed rates. The cost to banks of raising funds overseas also plays a major part in determining the cost of housing finance here. The crisis that has engulfed international credit markets over the past year took a turn for the worse over recent days with the collapse of California lender IndyMac and US Government intervention to prop up the country’s two major sources of mortgage funds Freddie Mac and Fannie Mae. The Government intervention may steady nerves, but underlines the depth of the US housing crisis and the fragility of its lending industry.

Not surprisingly, funding costs for New Zealand banks remain volatile. Some lenders have had to put up rates over the last fortnight because their funders have seen their costs rise. Some economists are warning that borrowers should not get excited about the depth of rate cuts to come once the Reserve Bank starts cutting. Inflation will inhibit the bank’s ability to cut quickly and deeply, they say, and lenders will still be at the mercy of funding costs in troubled overseas market. Tony Alexander, chief economist at the BNZ has said that further mortgage rate increases cannot be ruled out in coming months as lenders use up lines of funding financed at lower rates than those prevailing now.

Not all mortgage funding comes from overseas financial institutions, of course, and Kiwibank has pointed to its strong flow of retail deposits as a factor in its ability to launch a round of competitive new rates last week, including special deals for borrowers able to put down deposits of at least 20%.

Kiwibank and TSB Bank are the lenders behind the small sprinkling of sub-9% rates available now, concentrated around the mid and longer terms.

Over one-year, the term most frequently recommended among economists at present, there are no sub-9% rates available yet. But the cheapest advertised rates over this term are also from Kiwibank and TSB Bank, both at 9.29%. (See note on rates below)

The next key date for mortgage shoppers will be next Thursday, July 24 when the Reserve Bank sets the OCR. If there is a reduction, this is likely to affect floating rates and short-term fixes although some current prices will have included expectations of lower official rates. Whether the OCR moves, or not, the Reserve Bank’s announcement will give some clue about the outlook for official rates over coming months, confirming the wisdom of fixing for as short a term as six months, or possibly even tipping the balance towards floating rates for those who can afford some short term pain.

• Note that rates quoted in this commentary are drawn from the advertised rates listed on the Good Returns Mortgage Rates page. Some lenders offer special rates to larger borrowers. Borrowers should check rates for their own circumstances.