Banks raise short-term fixed mortgage rates

Banks are raising short-term fixed mortgage rates, indicating the time for cheap loans has come to an end.

ANZ yesterday hiked its fixed rates for six-month, one-year and two-year terms by about 25 basis points to 5.99 percent, 6.2 percent and 7.25 percent respectively. ASB Bank made an unannounced hike last week. Its one-year fixed rate of 6.25 percent is now the highest.

Economists are generally advising home owners taking out a new loan or rolling off a fixed-term mortgage to fix for a short period or the cheaper floating rate.

ASB and National Bank have the cheapest floating rates at 5.75 percent, while ANZ is the most expensive on 6.45 percent.

Bank of New Zealand chief economist Tony Alexander expects the floating rate to rise by about 3 percentage points by the end of 2011.

Reserve Bank governor Alan Bollard has repeatedly said he would not begin lifting the official interest rate till the second half of next year.

Economists believe the Reserve Bank will be forced to move earlier as the housing market heats up and the economy moves out of recession.

Commonwealth Bank of Australia's New Zealand economist Chris Tennent-Brown said short-term rates would rise as the Reserve Bank tightened monetary conditions, which he expects to be in the first half of next year.

Interest rates were already factoring in a substantial hike in the official interest rate next year and short-term fixed rates rising over the next six months.

Longer-term rates of three to five years were now above their long-term averages at between about 8 percent and 8.75 percent, and too expensive.

By comparison short-term rates were still well below their long run average of about 7.7 percent, making them a good option for borrowers looking for certainty in their repayments, Mr Tennent-Brown said. They would also provide some insulation from expected big increases in the floating rates next year.

"Those rates will really whip around once the Reserve Bank starts to hike," Mr Tennent-Brown said.

But Mr Alexander says floating is the best option for borrowers taking out a new mortgage or rolling off a fixed rate. "The time to fix has been and gone in this cycle and borrowers might as well now acknowledge they are in the for the ride," he said.