News and Opinion, sponsored by RaboPlus

By Bernard Hickey

Here’s the short version. Longer term fixed mortgage rates began rising again in early August after a couple of months of stability. This will prompt some to jump from floating to fixed as they consider buying for the first time or buying more rental properties. This is despite the Official Cash Rate remaining on hold until mid 2010 at least.

This has surprised a few people and may prove politically unpopular, but it makes sense when you look at the underlying drivers for interest rates. It reinforces the view that interest rates have stopped falling, particularly floating rates. There appears nothing to lose by jumping from floating to fixed now.

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By Bernard Hickey

Here’s the short version: Mortgage rates have bottomed out. The Reserve Bank of New Zealand (RBNZ) ended six months of record rate cutting on June 11 by leaving the Official Cash Rate on hold at 2.5%. It has called for banks to further reduce their short term mortgage rates, but this call is likely to be ignored, even though the RBNZ has reassured them that the OCR will be on hold until late next year.

Banks are increasing their longer term mortgage rates (3, 4 and 5 years), but are generally holding their floating, 6 month, one year and two year rates. Those wanting the certainty of a longer term mortgage to lock down their costs should fix now because the waves of government borrowing hitting our market and credit markets globally will push up longer term interest rates for years to come.

Those wanting the absolute lowest rate for the immediate future can probably afford to stay fixed at 6 months to 12 months for another 6-12 months because the economy will probably stay in recession until late this year or early next year and the Reserve Bank has ‘promised’ to keep the OCR at or below 2.5% until late 2010.

But the risk is that longer fixed rates will have risen sharply by the time a borrower tries to lock in a longer term rate. If my brother in law was asking, I’d say lock in for a couple of years now because rates are rising. It’s not urgent, but anyone borrowing should know that the long term average mortgage rate in New Zealand is around 8% and rates will revert there at some point from around 6% for 1 to 2 year rates now.

If my brother in law was still sceptical, I would say have it both ways by floating half and fixing half.

Here’s the longer version:

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By Bernard Hickey

Here’s the short version: Reserve Bank Governor Alan Bollard took the unusual step on April 30 of saying he would keep the Official Cash Rate under 2.5% until late 2010 because the recession will be long, possibly well into 2010.

This has taken some of the steam out of the recent rise in longer term wholesale mortgage rates, which then drove up longer term fixed mortgage rates. Therefore, the urgency to fix long before longer term interest rates rise has waned. Home borrowers can afford to wait on a relatively low floating or short fixed rate (6 months). But it would pay to be ready to fix quickly if rates start rising again, which may not be until next year. Another approach is to split the loan into a fixed component and a floating component, which allows the homeowner to hedge their bets somewhat. Bollard has changed his mind twice in the last 6 weeks and 18 months is an awful long time in this volatile economy.

Here’s the long version: Back on March 12 I argued in the previous brother in law’s guide that home owners who wanted to fix should fix now because longer term mortgage rates were likely to rise. That was because Reserve Bank Governor Alan Bollard had commented that he didn’t want to push the Official Cash Rate much below 2.5%. He seemed to set a floor for interest rates and suggested the rates cycle was nearing its trough.

He said back then he expected the New Zealand economy to bounce back reasonably strongly in the second half of 2009 because there had been so much fiscal and monetary stimulus pumped into the economy. Bollard also commented that he saw a ‘very nasty’ global inflation problem in years to come because of all the monetary stimulus and money printing going on in the Northern Hemisphere. His comments were more ‘hawkish’ (in favour of rate increases to stop inflation) than many had expected.

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(Updated on April 1 to include long rate hikes from Kiwibank and BNZ, a 6 month rate cut by BNZ, and RBNZ Governor Alan Bollard’s warning about an “unwarranted” increase in long term wholesale rates)

By Bernard Hickey

Here’s the short version. I see an extended global economic recession through 2009 and into early 2010 convincing the Reserve Bank to keep cutting the Official Cash Rate (OCR) to 2.5% by mid-2009, albeit in small chunks. This means we’re near the end of the rate-cutting cycle. Longer term fixed rates bottomed out in late February and are now rising quite quickly all around the world as governments borrow heavily and central banks print money, increasing the risk of inflation. Those wanting to fix their mortgage rates long should do it now.But those expecting lump sums (redundancy/bonus/inheritance/Lotto) or are paying off their mortgage quickly should stay floating, given the OCR could stay low for a year or two.

Here’s the long version

The Reserve Bank cut the Official Cash Rate on March 12 by 50 basis points to 3% and said it did not expect the OCR to drop below 2.5% because New Zealand needed to be competitive in international capital markets. This is code for: ‘We can’t cut rates too much more or international investors will stop funding our large foreign debts.’ On April 1 Governor Alan Bollard said a jump in long term interest rates after that March 12 announcement was “unwarranted”. Therefore, it’s worth looking at whether mortgage borrowers who are rolling over in the next couple of months should float or fix, and if they fix, for what period.

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Bank of New Zealand has announced it will increase its 4 and 5 year fixed mortgage rates by 10 and 29 basis points respectively to 6.49% and 6.69% respectively. This brings it into line with similar long term mortgage rate hikes announced in the last week by ASB and Westpac.

Our comprehensive mortgage rates table shows that only Kiwibank and ANZ-National have left their 3, 4 and 5 year rates around the 6.4-6.5% mark.

Meanwhile, in another sign of a steepening of the mortgage rate curve, ASB cut its 6 month mortgage rate to 5.8%, bringing it into line with the other big banks, but leaving it above BNZ’s ‘Classic’ rate of 5.69%. although the BNZ rate requires a 20% deposit and the purchase of other BNZ insurance and credit card products.

See more detail and context in our updated Brother in Law’s guide to mortgage rates.

By Bernard Hickey

Here’s the short version: Fixed mortgage rates are rising, but it’s possible variable mortgage rates could stay below fixed rates until later this year. Those choosing to go fully fixed for a 2 or 3 year term are betting the OCR will rise quickly above 5% by the end of 2010 or early 2011 from 2.5% now. That is possible if the economy recovers as strongly as most economists now expect and given it has averaged 6% since 1999. (Updated January 13)

Those choosing to go completely variable are betting the OCR will stay below 5% until at least late 2010, which is possible if the global economy remains stagnant and New Zealand’s economy recovers fitfully. I’d say to my ‘brother in law’ the safest bet right now is to split the mortgage into half variable and half 2 year fixed to allow early repayment and to reduce the risks of either a sudden move up in the OCR or no move at all.

Here’s the long version below

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