Tug of war

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Home loan rates are currently subject to two opposing forces and it is not clear if there will be one decisive winner, or if the two will cancel each other out.

Thursday, September 18th 2008, 5:06AM

Downward pressure is being put on rates by the Reserve Bank which last week cut its official cash rate (OCR) by 50 basis points and could make similar sized cuts again later this year. In the past when the bank has changed its OCR mortgage rates tend to move in tandem.

In these very unusual times, lenders aren’t matching the central bank on a blow-by-blow basis.

Upward pressure on rates is coming from the turmoil in the United States' financial markets. What we are seeing is that credit has been too cheap and now institutions are pushing up rates. This impacts on New Zealand borrowers, as most of our banks source some of their funds for home loans from offshore markets.

The banks will no doubt try to absorb as much of these increased funding costs as they can, but the pressure is still upwards.

When these factors are thrown into the pot the resulting picture is one where it appears interest rates are likely to fall, but the amount of fall is unpredictable and the magnitude isn’t as big as you may have expected (judging from past cycles).

There may be a little added relief from competitive pressures in the marketplace. I don’t expect “home loan wars” such as the Bank of New Zealand’s Unbeatable campaign to break out like in previous springs and summers.

But I do expect that banks will compete fiercely for business, especially as there is a huge volume of loans coming up for refinance and because the housing market appears to be getting its pulse back again.

The biggest changes to rates since the OCR cut have been to variable rates which are down around 50 basis points. This sees the big banks sitting at 10.45% with the exception of ASB on 10.25%.

In the competitive two-year fixed space the big banks range from ANZ/National’s 8.70% with their standard loans to ASB’s 8.90%. However some of the smaller banks have gone lower, notably TSB and Kiwibank which have rates at 8.48% and 8.49% respectively for deals which have at least 20% equity in them.

There is also a wide divergence in rates for shorter terms. For instance the lowest big bank six month rate is 9.25% from ANZ, BNZ and National while the other two big banks are 25 points higher.

With a range of factors in play and a variance in rates on offer borrowers need to think carefully about what strategy they want to adopt when it come to getting or refinancing a home loan.

You can check and compare all rates by looking at out our rates table

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