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14-03-2008

Flying high

Mortgage rates are continuing to rise even though the Reserve Bank held the official cash rate (OCR) at 8.25% last week.

By Maria Scott

There has been a general upward movement across the home loan market since the beginning of March, following rounds of increases in previous months.

The OCR was last increased in July last year but Westpac bank notes in its latest report on interest rats that fixed term mortgage rates have increased by 40 to 60 basis points since then.

Westpac also points out that the main pressures on rates are on floating rates and the longer-term fixed rates. Increases are being driven by the effects of the global credit crunch. Westpac says it looks increasingly likely that the global credit crunch will weigh on markets for some time, as banks try to protect their own balance sheets by tightening lending standards and calling in loans to more speculative players.

"As a result, the upward pressure on interest rates, independent of monetary policy is likely to persist, particularly around the end of each quarter, when the demand for cash tends to increase."

Westpac has softened its own stance on the outlook for rates, however. The bank's economists had until recently been forecasting further increases in the OCR. Now they believe the increases that have flowed into the mortgage market independent of the OCR, have effectively done the job that would otherwise have had to be done by the Reserve Bank. "We no longer expect further OCR hikes – but we do think the RBNZ will be on hold for a long time, to give inflation pressures a chance to moderate."

In the New Zealand home loan market, the affects of higher pricing in the wholesale money markets have been felt earliest by non-bank and specialist lenders. But this group maintains the mainstream banks, cushioned by the retail savings deposits that are part of their funding mix, are now also feeling the pinch. This is forcing them to re-price their loans. Among the non-bank lenders there is speculation that those relying on funds from securitisation will eventually find it difficult to obtain funds because securitised bond issues have fallen out of favour. Mainstream banks say they will be in a stronger position than their non-bank competitors in general to ride out the storms in the credit market.

Lenders are indicating the market has slowed quickly and that there is more pain to come.

There is also speculation that at least one more non-bank lender will be sold as part of the general rationalisation now underway, as a result of the falling level of demand for loans and the high cost of funds.

All of this points to a market where there will be fewer lenders in future and less competition. Funds will be more difficult to raise and costs will be relatively higher than during the credit boom years of the last half-decade. The years of cheap credit look to be over.

The view emerging among economists is that there is still a risk of higher rates, and an outside possibility of a higher OCR, but it is also possible that rates could drop quite suddenly. This is certainly what has happened in the US. For borrowers trying to make sense of it all, probably the best conclusion to draw is that fixing is still a good move, but not for too long. In other words, the popular two-year fix remains a reasonable bet.

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