Short term rates up, long term rates stable

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All the major lenders have now put their floating rate loans up to 10.05% following the latest increase in the official cash rate (OCR) to 7.75%.

Wednesday, May 9th 2007, 3:44AM

by Maria Scott

There has also been some movement over the last two weeks in six month and one year fixed rates which are influenced by the OCR. On longer terms, however, there have been fewer changes.

The wholesale lending rates that determine the cost of longer term fixed home loans have fallen slightly since the Reserve Bank set the new OCR. The absence of a warning by Reserve Bank Governor Alan Bollard about the future direction of rates was interpreted by financial markets as a sign that another increase was not imminent.

ASB’s economics team says that financial markets are currently a suggesting a 25% probability of a further rise in the OCR on June 7.

Has the tide has finally turned for borrowers?

No-one is expecting the floating rate to fall off its double-digit perch soon but the cost of wholesale funding for fixed terms is being watched closely. It is too soon to say whether the pressure is easing on borrowers’ favourite mid-term fixed rates and there are uncertainties in the economy to be resolved, not least the Budget on May 17. The market could change in favour of borrowers if banks start price cutting again.

The general trend seems to underline the benefits of avoiding commitment to long term fixed rates, choosing a shorter term, or a mixture of shorter terms in the hope that rates will be falling by this time next year, even if only slightly.

Among the big banks, six month money ranges from 8.90% to 9.05%, one-year fixes from 8.90% to 9.05% while all are charging 8.90% over two years.

There are some lower rates to be found among smaller lenders and non banks but not all have responded yet to the latest OCR move. Borrowers need to check the smaller lenders’ criteria; some lend only on low loan-to-value ratios.

Tony Alexander, chief economist at BNZ is recommending that in the current market borrowers should avoid signing up to a rate until late in the financing process. “I would probably not fix my rate ahead of expected drawdown within the next couple of months but would take the rate of my preferred term on the day.”

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