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23-05-2008

Floating up, fixing down

Home Loan Report By Maria Scott

Green ink continues to spread across Good Returns' mortgage listings as non bank lenders join the mainstream banks in cutting the cost of fixed rate funds over the one to three year terms.

The cheapest one-year rate is from AMP Home Loans on loans of $200,000-plus, at 9.30%t, rising to 9.35% from NZ Home Loans and Sovereign, each for $275,000-plus. Kiwibank, ANZ, National Bank and ASB are among a clutch of lenders charging 9.40% over a year. 

Kiwibank leads the pack over two years at 8.99 per cent where it is the only sub-9 per cent rate in the market over this term and 26 basis points cheaper than the next cheapest rates. BNZ's 2-year Classic rate is at 9.29 per cent.

The reductions on short-to-medium term rates follow falls in the cost of wholesale funding for banks and also expectations that the Official Cash Rate will start to fall as early as September and by as much as 50 basis points. 

Floating rates have continued to rise – several lenders are now charging 10.95 per cent - as have some five year rates.

The new trends in mortgage rates have made the choice for borrowers relatively straight forward; one and two year fixes are not only the cheapest but should also see borrowers through to a period when the OCR and rates generally are on a downward path. 

Some commentators are suggesting that fixing for as short a period as 6 months may be a good strategy for some.

Westpac says: "Rates remain high, but recent falls provide some relief. Those willing to take a punt may wish to fix for say six months and see what happens. For those who require more certainty, given that funding costs could still blow out, we suggest a 1 year rate should see us through the turmoil." 

Mortgage advisers say that borrowers with larger debts should still spread their mortgage finance over a variety of terms. But advisers are concentrating more on one and two year terms and generally avoiding terms of more than three years.

ANZ has revised its recommendation to property investors. In the latest issue of its Property Focus bulletin, the bank says: "We've previously recommended a chunk of borrowing be locked for five years. We are inclined to step aside from this for now, given the shape of the fixed rate borrowing curve." 

Borrowers should continue to have a degree of diversification, says ANZ but "the 1 year part of the curve, and even shorter duration borrowing, looks to be the sweet spot at this juncture".

Tony Alexander, chief economist at BNZ forecasts that fixed rates will fall by about 1.2 per cent by the end of the year. He recommends 1 year terms "at the absolute most".

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