ASB economists say floating mortgage rates unlikely to fall further; sees a 'window of opportunity' to fix with low fixed rates

ASB's economists have issued a research note saying they did not expect the Official Cash Rate (OCR) or floating mortgage rates to fall this year and that currently low fixed mortgage rates presented a 'window of opportunity' for those borrowers who wanted to fix.

ASB Economist Jane Turner said in the May 16 note financial markets may be expecting the Reserve Bank of New Zealand (RBNZ) to cut the OCR, but she expected the official rate to remain on hold at 2.5% until March 2013. The Reserve Bank would then have to lift it to 4% by mid 2014 to contain inflationary pressures as the economy recovered and Christchurch was rebuilt.

"For borrowers, this means that floating mortgage rates are likely to remain at very low levels for the rest of the year, although borrowers do need to be prepared for rising interest rates from 2013," she said.

"A combination of domestic and offshore events has seen the market start to price in interest cuts. This has reduced domestic wholesale funding costs, and lowered some fixed‐term mortgage rates," she said.

Banks have cut their 1 year mortgage rates by around 30-40 basis points to around 5.2% in the last two weeks in response to those wholesale market moves and as banks compete hard for new business in a broadly flat borrowing market.

See all bank mortgage rates here.

"In some cases these (fixed rates) are lower or at similar levels as the floating mortgage rate," Turner said.

"Our view is these declines may not be sustained unless the RBNZ follows through, and provides a window of opportunity for those borrowers that prefer certainty to protect themselves against further interest rate increases," she said, adding however that the outlook was uncertain and borrowers should weigh those risks for themselves.

"Borrowers should keep in mind that large uncertainties remain around the economic outlook, particularly renewed European instability. Given the risks to the economic outlook, it is equally conceivable borrowing rates could end up either lower or higher than average," Turner said.

"Faced with uncertainty the best strategy for borrowers is to weigh up what their priorities are and make the choice that looks the best aligned with them."

See Bernard Hickey's guide to Fixed vs Floating, which has been updated with ASB's views (fix), along with those of BNZ (float or fix 3 years), ANZ National (float) and Westpac (float).

Also, see our Fixed vs Floating calculator here.