Floating rate the sweet spot

Friday, 09 December 2011 11:52

Floating home-loan rates look like the best option for borrowers, with the official cash rate likely to remain on hold until late next year, economists suggest.

While the Reserve Bank left the OCR unchanged yesterday at 2.5 per cent, borrowers coming off high fixed rates will be able to move to floating mortgages at much cheaper rates in coming months.

ANZ Bank estimates that the effective average mortgage interest rate, now about 6.15 per cent, will fall to 5.9 per cent by the end of next year, equal to a reduced interest bill of about $400 million, on $170 billion of debt.

So, while the Reserve Bank is holding the OCR and will keep it low for perhaps another year, there is still a hidden boost coming into the economy.

ANZ chief economist Cameron Bagrie said the Reserve Bank had "kicked for touch any notions that interest rates are going up". Floating rates were the "sweet spot" for borrowers and would remain so for some time.

But, as borrowers came off fixed-term rates, there would be a "passive stimulus" for the economy in the next six to nine months equal to cutting rates by 25 basis points.

The hurdle to the Reserve Bank actually cutting the OCR was high and would need to see a repeat of 2008's global financial crisis.

"While the outlook is grim, I don't think it is that grim," Bagrie said. But he suggested it was also unrealistic to expect the global economy to be stable in the first half of next year.

It was, he said, hard to see a decent performance in the global economy which would be a precursor to interest rates moving up at a solid clip. "We are so far away from that scenario it is ridiculous."

The New Zealand economy was scratchy, with "grumpy growth".

"But in a relative sense, we are a beacon of opportunity [compared with others]."

The Government retained the confidence of investors when parts of Europe did not. Business confidence was holding up, commodity prices had fallen but remained relatively high, and the kiwi had fallen to act as a buffer.

The economy's report card rated a B to B-minus overall, he said.

Australia cut its official cash rate this week, but that was to 4.25 per cent – still much higher than New Zealand's rate.

Bank of New Zealand chief economist Tony Alexander said it would be best to stay on a floating rate, with the Reserve Bank indicating it would not change rates "for quite some time".

The central bank pointed out the risks of a slowdown in Europe, with the prospect of prolonged recession and a possible slowdown in Asia. "I don't see fixed interest rates jumping up much in the near future, so I'd sit floating," he said.

And, unless the eurozone fell over, Alexander expected house prices to rise in New Zealand next year, on average about 5 per cent, led by Auckland, where prices have risen about 6 per cent in the past year.

House-building rates were "exceedingly weak", with an undersupply of homes, so that would push up prices. He also expected a lot of young first-home buyers to move into the market in the next year or so.

When people wanted to build new homes, the country would quickly run out of builders, especially with the rebuild of Christchurch looming.

But Alexander said it was an uncertain global picture, with massive shifts in interest-rate forecasts in the past year. "Much as I'd be happy sitting on a floating rate, a lot of people may find two-year fixed rates about 5.89 per cent attractive," he said.

"That certainty might suit first-home buyers, for the first couple of years of a loan."

- BusinessDay.co.nz

Sourced from:  www.stuff.co.nz