by Paul McBeth
Mortgage rates were described by one broker last week as "sure to rise" over the next 18 months, just like that familiar baking accessory. We round up the latest moves and take a look at some of the key influences on rates (see our table for more details).
Floating mortgage rates: In the last ten days, the main trading banks have pushed these up from 7.25 per cent to 7.60 per cent. Other lenders have held out a bit longer (Perpetual Trust and AXA New Zealand were among those to announce increases late last week), but you can still tie down floating rate mortgages with some of the non-banks for under 7 per cent.
Short-term fixed rates: still less than 8.0 per cent for one-year terms, but closing fast. At the longer end, they're now as high as 9.20 per cent for five year terms.
So what's behind the rises? For one thing, the Reserve Bank's Official Cash Rate (OCR). Changes in the OCR affect floating and short-term fixed mortgage rates.
The two changes to the OCR so far (it was brought in last March) have been from 4.5 per cent to 5 per cent last November and up agan to 5.25 per cent in January. In a recent weekly commentary, WestpacTrust economists predicted that the OCR would reach 6.5 per cent by the end of this year and peak at 7.0 per cent mid 2001.
They're expecting a 50 percentage point rise at the OCR's April review and further 25 point rises at the May, August and November reviews. And if that's the case, you can expect a steady increase in floating mortgage rates.
Commentators are expecting further upward pressure on interest rates, thanks to global economic growth and the RB's stance on curbing future inflation.
As far as longer term mortgage rates go, what's happening in the USA - in particular in the US bond market - has an impact here. Mortgage broker Lindsay Hore of Forsyth Barr notes that the US 10 year bond rate moved 40 percentage points just since December.
However, he points out that the reason for inflationary pressures (and hence rate increases) is positive in that it's fuelled by strong economic growth.
"This trend is pretty much global with Australia, Britain and USA all going through similar adjustments to keep the growth from 'overcooking' the economy," Hore says.
Late last week the United States Federal Reserve boosted two key interest rates under its control (the rate for overnight loans between banks and the discount rate) by 25 percentage points in a bid to temper inflation. The Australian Reserve Bank also lifted its cash rate, from 5.0 per cent to 5.5 per cent.
Back in New Zealand, a fall in unemployment during the December quarter (the figures were announced Friday) were interpreted by one economic group as adding significantly to the RB's inflation worries. The low exchange rate is also a looming problem.
On another tack, Kieran Trass, Managing Director of Apex Mortgages, points out the changing relationship between short and longer term rates (known as the yield curve). In a recent newsletter, he says it's likely that floating rates will be higher than fixed rates in the very near future.
"This creates a real dilemma for you in the event your fixed rate mortgage is due to expire in the next 12 months because you will potentially be faced with a large increase in your interest cost....If, for example, you have a $250,000 mortgage on a fixed rate of 6.5 per cent expiring soon then you are already facing an increased interest cost of around $230 a month (assuming you opt for a floating rate of 7.60 per cent per annum)."