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Home loan report: Tweaking continues

Lenders are continuing to tweak their rates downwards as they react to the cut last month in New Zealand's official rate of interest and look forward to further falls.

by Maria Scott

A survey or 12 economists by Good Returns found unanimous agreement that the official cash rate (OCR) would be cut by 25 basis points to 7.75% at the next Reserve Bank review on September 11.

Lenders have been concentrating on their one and two-year rates, but Kiwibank has this week reduced its six-month rate by five basis points so it now shares the lowest advertised rate in the market over this term with Silver Fern, at 9.6%.

Economists and brokers have been recommending terms as short as six months in the belief that borrowers will be able to cash in on much lower rates in six months or a year's time.

But a week is a long time in the mortgage market; conditions and views can change quickly.

The latest Property Focus report from the economics team at ANZ suggests that current market rates may have anticipated lower rates in coming months so borrowers might do well to consider fixing over 12 to 18 months.

ANZ explains that the fixed term borrowing rate today reflects expectations of what the Reserve Bank will be doing over the coming 12 to 24 months.

"With the RBNZ starting the easing cycle, the market of course has been quick to anticipate more. In fact, there are now 150 basis points of rate cuts priced into the NZ curve.

"It is these expectations as opposed to cutting the cash rate itself that determines where the one and two-year borrowing rate resides, although of course, it is also being heavily influenced by higher international credit costs."

"We still like shorter dated duration borrowing, but are more inclined towards 12 to 18 months, as opposed to the six to 12-month part of the curve."

ANZ says borrowers should continue to diversify (so they have a spread of fixed terms).

Mortgage advisers argue that rate is only one factor in choosing a mortgage and the benefit of organising a repayment strategy is confirmed by the results of research published in the latest issue of Consumer magazine.

This looked at a variety of scenarios for a couple where each earned $60,000 a year, before tax, to repay a $350,000 loan. The cheapest strategy was to use two-year fixed rates but to save and make lump sum payments at the end of each fixed term (the calculation assumed the couple saved all their disposable income and used a credit card for 80% of household expenses, paying this off in full each month).

Total interest on this system worked out at $285,980 and the loan was repaid in just over 14 years. A series of two-year rates, where only the minimum payments were made over 25 years cost $545,581 in interest.

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