Interest rates for fixed mortgages are continuing to firm, with some three-year rates now close to eight per cent and five-year loans hitting the 8.5 per cent mark.
Lenders who've increased their fixed rates over the last ten days include the main banks as well as AA Financial Services, AMP Ergo, AMP Banking, AXA NZ (formerly NM Lending), Metropolitan Life, NZ Home Loans, Sovereign Financial Services and SBS (see our rates table for details).
Fixed rates have been on the rise since May and most commentators expect them to keep edging up over the rest of the year. However, as the Real Estate Institute noted in its latest monthly lending survey, the pace has picked up with some rates rising by as much as 0.45 percentage points in July alone.
While Institute National President Max Oliver thinks that will flow through to floating rates, these have so far remained stable. However, that's hardly surprising given that their main taskmaster is the Reserve Bank's Official Cash Rate. The OCR is up for review this morning (Wednesday), but isn't expected to shift from 4.5 per cent where it's stuck since it was first brought in in March.
So, what are the chances of more fixed rate moves? BNZ's Chief Economist Tony Alexander says these rates are being driven by the situation in the US (see below for his full explanation). "Once the tightening cycle in the US is near ending (and it has barely started), we will see New Zealand long rates fall again."
Writing in this month's New Zealand Observer, Alexander says US interest rates have already been rising over the past two to three months in response to expectations - realised to the extent of 0.25 per cent - that US monetary policy will tighten.
What determines our fixed interest rates?"It goes like this. If we are going to lend you money fixed for, say, three years, then we borrow three-year money on the other side of the ledger. We borrow that money not from New Zealand individuals like you and me because hardly anyone deposits money in a bank in New Zealand for periods beyond six months. Instead, we borrow it from the wholesale markets where bulk quantities of money are transacted.
Who lends us the money for three years? Maybe a large investor in New Zealand. But that large investor can just as easily lend that money for three years overseas. In addition the dearth of long term investors in New Zealand means we usually have to look overseas in some capacity anyway.
The ready availability of alternative three-year investments to investors means we in New Zealand have to offer an interest rate which reflects the level for similar periods overseas, and mainly in the US. This means that if US interest rates go up then our cost of borrowing to lend fixed goes up. So we are forced to raise our rates or take a reduced margin - which is a separate issue." Tony Alexander, Chief Economist, Bank of New Zealand
