No hurry to fix after OCR announcement
Those with floating rate mortgages needn't be in any hurry to move to a fixed rate after Reserve Bank governor Alan Bollard left interest rates unchanged and signalled any increases will be much less than projected even three months ago.
Thursday, December 9th 2010, 10:03AM 
8 Comments
by Jenny Ruth
Bollard left his official cash rate (OCR) unchanged at 3% and said while it is likely to rise modestly over the next two years, he won't be moving it "until the recovery becomes more robust and underlying inflationary pressures show more obvious signs of increasing."
Bollard specifically referred to weak household spending, weakening housing market activity and the prospect house prices "may decline a little further in the near term," dashing hopes raised by Quotable Value's suggestion earlier this week that house prices may be stabilising.
"The main thing the Reserve Bank is responding to is weaker than expected activity through the middle six months of this year," says Brendan O'Donovan, chief economist at Westpac.
"They've pushed out the next rate hike to be in quarter three 2011 rather than quarter one," O'Donovan says.
Right throughout the forecast period, the central bank has lowered its interest rate expectations by about 30 to 40 basis points, he says.
"The Reserve Bank is forecasting a recovery still and they're anticipating better consumption and investment but they want to see it before they respond to it."
Bollard also said current low rates are having less of a stimulatory effect than in the past.
"The big change is how the Reserve Bank is viewing the effectiveness of interest rates," says Nick Tuffley, chief economist at ASB Bank.
While once a neutral OCR rate, neither stimulating nor impeding the economy, was regarded as about 6.5%, now its probably about 4.5% and even at current low levels the stimulatory effect is a lot less than previously thought, Tuffley says.
"Therefore there's no rush in lifting (the OCR) right now. They can leave rates on hold for longer." Tuffley says the next OCR rise may be in June or July next year.
Robin Clements at UBS New Zealand says Bollard has still made it clear he will be lifting the OCR at some stage but the tone is definitely more dovish than previously.
"Now, the emphasis is on keeping rates low until the economy is stronger."
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The lender in question currently passing on significant costs to its home loan customers in the form of both excessive low equity premiums and fees to hold interest rates in advance of existing home loans maturing is Kiwibank.
Example : Couple paying $650,000 for a home in Auckland and borrowing 95% of the purchase price i.e. a mortgage of $617,500. The Low Equity Premium that Kiwibank will charge a customer at this level of borrowing is 4.18% of the loan amount i.e. $25,811! ASB Bank is now back to lending up to 95% for select customers and with the above scenario its low equity premium would (only) be $6,175 i.e. 1% of the loan amount being borrowed. This begs the question then of why there is such a massive difference on cost between Kiwibank & ASB Bank on this transaction???
Kiwibank is also making it existing home loan clients pay fees (non refundable) to lock in interest rates in advance of their home loans maturing i.e. if you had a home loan at Kiwibank that was due to mature on the 20th Feb 2011 and you wanted to lock in a rate now with $200,000 fixed for 2 years and $100,000 fixed for 3 years it would cost you $250 per loan portion i.e. $500 in total + another $100 per each loan to action the refix i.e. $200. Total cost to rate lock and refix would thus be $700!! NO other bank in New Zealand charges these kind of refix fees to existing home loan customers! Typically other banks will charge a customer nothing to refix and reserve a rate in advance of maturity nowadays.
As interest rates move upwards next year (eventually) more and more borrowers will want to start to lock in interest rates as far out from maturity as possible with their bank. If they happen to bank with Kiwibank they will find some unexpected costs popping up.
I should mention also that the above low equity premiums & refix fees also apply to AMP Home Loan and NZ Home Loan customers as both these organisations use the Kiwibank Home Loan product.
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I bet we will not see any economist(most are on the banks payrolls anyway)advocating a DROP in floating and short term rates as there is no need to "factor in" any increases for the next 3-6 months.