Warning interest rates may not have much further to fall

Small interest rate increases can make a big difference to the amount of money you have in your pocket, if you have a ...

Small interest rate increases can make a big difference to the amount of money you have in your pocket, if you have a big mortgage.

Homeowners are being warned this may be as low as interest rates are going to go.

The deals on offer from New Zealand's major banks are at historical lows.

According to mortgagerates.co.nz, the median one-year rate on offer from the banks is 4.69 per cent. For two years, borrowers can take out a median rate of 4.75 per cent.

But ASB and Kiwibank have now moved to increase their two-year rate, to 4.29 per cent. Some commentators say it could be the start of a slow rise in interest rates across the board.

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One of the key reasons is a change of tone from the Reserve Bank.

Deputy governor Grant Spencer's speech on Thursday made it clear that the bank is very worried about house prices. It considers that low interest rates are one of the factors adding heat to the market.

That has led some to revise their predictions as to what the next move for the official cash rate might be.

Commentator Annette Beacher, of TD Securities, said it now seemed less likely that there could be a cut in August.

"This speech strongly suggests than an August cash rate cut is the last thing the housing market needs while supply is hampered and fresh macroprudential tools are still in the 'discussion' phase," she said.

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Nick Tuffley, ASB's chief economist, agreed. "We still think the cash rate could go a bit lower but there are increasing questions around how much lower given the Reserve Bank's stance which is increasingly that of worrying lower interest rates will fuel the housing market and it doesn't mater so much if inflation doesn't pick up as quickly. There's a risk we don't see them going much lower."

But even if the official cash rate does come down,  international market volatility will probably put pressure on banks' funding costs, so they may not pass on the full extent of the drop.

Tuffley said there was still some fallout to come through globally that would affect bank funding rates. The big four banks' Australian parents are on watch for a credit rating downgrade, as a result of the Australian Government also being on watch post-election.

Mortgage adviser Craig Pope said he was starting to suggest clients lock in longer-term rates. "There's so many external factors out there that are affecting things, it's quite a volatile time. I'm telling clients now might be a good time to fix the bulk of their lending if they have been hanging on for a further drop."

He said the rates on offer were very good by normal standards. "It wasn't that long ago that for 4.99 per cent people were clambering over themselves to get it but when rates are low they are never low enough."

Claire Matthews, a banking expert at Massey University, said there were a lot of international factors that had the potential to push interest rates up.

"People have been saying for a long time that interest rates are going to go up and they haven't really.  There may be a little bit of downward movement to come but whether that is as low as recent lows, it's difficult to say. Banks are facing a whole mix of different forces and it's a matter of which takes precedence."

Adviser Robert Oddy said those who were taking out large mortgages should take heed of the warning. A small increase in interest rates could make a significant difference on a big loan, he said.


 - Stuff

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