Home loan report: Fragile market

Announcing the 25 basis point cut in the official cash rate (OCR) to 8% last week, Reserve Bank Governor Alan Bollard said that the cost of funds raised abroad by banks had been rising in recent months as the international financial situation deteriorated. The cut in the OCR to 8% would “help to mitigate the effect of these increases on the actual borrowing costs paid by firms and households”.

His comments were interpreted by economists as an indication that had the OCR not been cut, mortgage costs would have continued to rise regardless. By cutting the OCR, the Governor hoped to keep a lid on the increases.

This view appears to have been borne out by the pattern of rate changes that has emerged since the OCR cut. Asteron, GEM Home Loans, Wizard, Global Home Loans, United Home Loans and General Finance all increased their two-year rates by 10 points while reducing their one-year rates by 20 basis points.

This contrasts with reductions in two-year rates by the major banks and some other lenders. Ten lenders are now charging less than 9% for two-year fixed rates, although some offer this rate only on larger loans (see the Good Returns rates table for full listing).

However, non-bank lenders wonder how much scope the banks have to continue cutting rates.

Mortgage strategists are continuing to suggest that borrowers opt for shorter terms in the expectation that home loan rates have further to fall.

Tony Alexander, chief economist at the BNZ said: “I would still be inclined to fix for a one-year period and any thoughts one might have had of seeking extra security from a two year rate or longer should be well kicked into touch.”

ASB said that two consecutive six-month terms would probably work out cheaper than the more conservative approach of a one-year term.

Westpac said that floating and six-month fixed rates may eventually fall but cautioned that further falls in fixed rates were not guaranteed. “The global credit crunch continues to raise the cost of borrowing offshore for New Zealand banks, which could limit passing on OCR reductions. In this environment, waiting to fix may be a risky option.”

There are varying views about where the OCR will bottom out. Westpac predicts that the last cut will come in January, leaving the OCR at 7%. ASB expects a series of 25 basis point cuts, ending with an OCR at 6.75%. BNZ expects that the OCR will fall to 7.25% at the end of the year, to go below 6% by late 2009 and possibly to reach 5.5% by October next year.