Short-term borrowing opportunities shrinking

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Christmas is coming and mortgage rates are falling. The Good Returns mortgage rate table is looking festive as it registers scores of reductions by lenders. Borrowers now need to consider how much lower homeloan rates will go and whether it is time to lock into one of the new fixed rate deals.

Friday, November 28th 2008, 8:41AM

Economists at Westpac believe they have the answer. In this week’s economic briefing they state: “Wholesale interest rates imply a very deep and front- loaded easing cycle by the RBNZ, and much of this has already been reflected in lower mortgage rates. The advantage to floating or fixing for a short term is diminishing now, and borrowers should be looking for opportunities to extend the duration of their debt.”

The Reserve Bank is due to set the new Official Cash Rate (OCR) next week and some economists believe that the reduction could be as much as 150 basis points, bringing the OCR down to 5%.

But the market view is that the round of cuts in home loan rates implemented over the past week or so has anticipated a steep cut in official rates. It would certainly make sense for lenders to set out their stalls now – with a month to go until Christmas - rather than waiting until the OCR is re-set just as the public’s attention turns in earnest to parcels and parties. As to whether economic conditions will justify further cuts in homeloan rates in the New Year, if the events of the past few months have taught us anything it is that conditions can deteriorate beyond the expectations of even the most informed market commentators, and fast.

The latest round of cuts should certainly encourage borrowers to look at the rate they are currently paying and work out whether, if on a high fixed rate, they can save money by refinancing even after the costs are taken into account.

With floating rates now starting at Kiwibank’s market-leading 7.95%, floating does not seem a high risk option but every borrower’s circumstances are different and not everyone will want, much less be able to switch to the lowest rates in the market.

Mortgage shoppers need to remember that the deal you are able to strike now will depend heavily on how much a lender wants your business; the less equity you have in your property the less attractive you will be. For those who can shop around it may make sense to hedge bets by splitting debt between fixed and floating rates.

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OCR cut to 7.5% »

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