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To fix or float, what is the answer?

Has New Zealand’s interest rate market fundamentally changed and does that mean attitudes towards floating versus fixed rates should change as well?

Monday, July 2nd 2001, 10:23AM

by Jenny Ruth

Stuart Marshall, economist at merchant bank Bancorp, thinks it has and attitudes should change.

He argues that he demise of the Reserve Bank’s monetary conditions index (MCI) in March 1999 and its replacement with the more steady and stable official cash rate (OCR) has meant a structural shift in the way New Zealand interest rates are priced.

"In this new OCR environment, and despite travelling through a period when monetary policy has completed a full tightening-neutral-easing cycle, the yield curve has managed only a fleeting foray with a negative slope (when long-term rates are higher than short rates)," Marshall says.

In other words, during the whole cycle, longer-term interest rates have usually been higher than short-terms rates.

Under the MCI regime, rates were generally higher and more volatile and for long periods long-term rates were lower than short term-rates.

That means under the OCR regime, fixing the interest rate on a loan will generally be more expensive.

"If we are correct that the interest rate market structure has indeed been altered, then policy should be reviewed," Marshall says.

"Absolute certainty of interest cost is likely now to come at a consistently higher price. Is that certainty still worth it?" he asks.

While his questions are directed at corporate treasurers, the logic should generally be the same for home loan borrowers, Marshall says.

The exception is when we get market distortions, as is happening right now.

Lenders’ profit margins on floating rate loans are currently nearly double that on fixed-rate loans. Most floating rates are now about 7.7% compared with the 90-day bank bill rate of 5.83%, a difference of 1.93 percentage points.

But one-year fixed mortgages are being offered at between 6.7% and 7.1% (and at least one offer at 6.45%), compared with the one-year swap rate of 6% in the wholesale market, a margin between 0.7 and 1.1 percentage points.

And three-year fixed mortgages are mostly being offered at 7.8% compared with the three-year swap rate at 6.8%.

"At the moment, if this is the low for short-term interest rates, then it means the variable rate is likely to be going up. That means locking away for three years at 7.8% is a good thing," Marshall says.

« Broking firm challenges the marketLower mortgage rates likely this year but not yet »

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Mortgage Rates Table

Full Rates Table | Compare Rates

Lender Flt 1yr 2yr 3yr
AMP Home Loans 6.49 5.69 6.29 6.40
AMP Home Loans $200k+ 6.39 5.59 5.99 6.30
AMP Home Loans LVR <80% - - 5.99 -
ANZ 5.99 5.85 6.49 6.85
ANZ LVR > 80 5.99 6.35 6.99 7.35
ANZ Special - - 5.95 -
ASB Bank 6.00 5.85 6.49 6.85
ASB Bank Special - - - -
BankDirect 6.00 5.85 6.49 6.85
BankDirect Special - - - -
BNZ - Classic - - 5.95 -
Lender Flt 1yr 2yr 3yr
BNZ - GlobalPlus 6.19 5.85 6.29 6.29
BNZ - Mortgage One 6.60 - - -
BNZ - Rapid Repay 6.19 - - -
BNZ - Std, FlyBuys 6.19 5.85 6.29 6.29
BNZ - TotalMoney 5.99 - - -
Credit Union Auckland 6.20 - - -
Credit Union Baywide 5.85 5.90 6.50 -
Credit Union North 6.45 - - -
Credit Union South 5.75 - - -
eMortgage 6.04 6.15 6.69 7.19
Fidelity Life 5.70 5.40 6.00 -
Lender Flt 1yr 2yr 3yr
Finance Direct 6.10 6.45 6.69 7.10
First Credit Union 6.45 - - -
General Finance 5.95 6.25 6.50 7.10
HBS Bank 5.90 5.60 5.99 6.35
HBS LVR > 80% - - - -
Heartland 5.95 6.25 6.50 7.10
Heretaunga Building Society 5.75 5.50 6.30 -
Housing NZ Corp 5.75 5.50 6.30 6.40
HSBC Premier 6.24 5.59 6.29 6.55
HSBC Premier LVR > 80% - - - -
HSBC Special - - 5.79 -
Lender Flt 1yr 2yr 3yr
Kiwibank 5.90 ▲5.85 ▲6.19 ▲6.60
Kiwibank - Capped 5.65 6.50 - -
Kiwibank - Offset 5.60 - - -
Kiwibank LVR > 80% - - 6.29 6.40
Liberty 5.64 - - -
Napier Building Society 5.80 6.00 6.70 -
Nelson Building Society 6.45 5.95 6.60 -
NZ Home Loans 6.10 5.69 6.29 6.60
Perpetual Trust 7.70 - - -
RESIMAC - lo doc 7.34 7.14 7.49 8.05
RESIMAC LVR < 80% 5.84 5.64 5.99 6.55
Lender Flt 1yr 2yr 3yr
RESIMAC LVR < 85% 6.84 6.64 6.99 7.55
RESIMAC LVR < 90% 7.84 7.64 7.99 8.55
SBS Bank 5.90 5.60 5.99 6.35
SBS LVR < 80% - - - -
Silver Fern 5.95 6.10 6.55 7.05
Southern Cross 5.95 6.25 6.50 7.10
Sovereign 6.10 5.85 6.49 6.85
Sovereign Special - - - -
The Co-operative Bank 5.95 5.65 5.99 6.35
TSB Bank 6.04 5.40 5.99 6.40
Wairarapa Building Society 6.20 5.75 5.95 -
Lender Flt 1yr 2yr 3yr
Westpac 5.74 5.85 5.95 6.85
Westpac - Capped rates - 6.19 6.69 -
Westpac - Offset 5.74 - - -
Median 6.00 5.85 6.29 6.85

Last updated: 22 April 2014 9:04am

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