Decisions looming for borrowers

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For nearly a month there home loan rates have stayed reasonably static with few changes to report – however that is likely to change very soon.

Tuesday, January 13th 2009, 9:33PM

The trigger for change will be the Reserve Bank’s first official cash rate announcement for the year which is due on January 29. The overwhelming expectation is that there will be further cuts to this benchmark rate which will see the cost of home loans fall further.

Some predictions are that a full 100 basis points will be cut off the OCR and that it will bottom out in the second quarter of the year at 3.50%, compared to its present level of 5.00%.

The OCR cut will directly impact shorter term rates being floating and fixed rates up to a year or 18 months in duration.

Here at present there are some clear differences on what’s on offer.

The biggest variation is in the floating rate market where newly-minted bank SBS is the market leader with a 7.20% rate. Kiwibank is also sharp offering 7.45%. The banks are much higher with rates around the 8.20% mark.

With six month rates the big trading banks are just under the 7% mark, while some of the smaller banks are lower, however it should be noted there maybe conditions attached to these rate.

With further OCR falls it could end up being a race between lenders to see who can get these shorter term rates below 6%, (say 5.99%) While it maybe a stretch to get there it is possible.

Further out the interest rate curve with the longer maturity rates there has been far less action than at the short end. However, there are signs that this part of the market could become quite active, as Westpac recently cut its three, four and five year fixed rates.

This action will be driven by two things; a shift in advice where people will be encouraged to go from from short-term borrowing to locking in longer rates, and also changes in the international financial markets. There a signs that international credit markets are starting to ease up a little which could be beneficial for borrowers.

This year could end up being the classic game of two halves. In the first spell interest rates will be low and in many cases cheap on historical levels. However later in the year don’t be surprised to see things turn around and rates rise.

For borrowers, either taking out new loans or refinancing existing ones there will be a need to start thinking longer term and making a call when it is best to lock into the longer term rates.

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