Tauranga Property Investors' Association

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Glimmer of hope?

While there is very little good news for borrowers over recent months there has been the slightest glimmer of hope this week.

That hope was some slight falls in short and medium terms from a number of lenders including ASB, Bank Direct and Bank of New Zealand. While that is good news it still needs to be kept in perspective that all home loan rates are expensive, on historical standards, at the moment.

For instance floating rates are well into double digits and five-year rates, although the cheapest of the lot on offer, are still very high.

What's more the likelihood of quick falls in rates seems slight at the moment. Some economists are suggesting rates could start easing later this year but the Reserve Bank is still firmly telling people not to hold their breath for cuts.

In a speech last week Reserve Bank governor Alan Bollard said "monetary policy in New Zealand has been relatively tight for some time, and we think the current setting of 8.25% with a flat outlook remains appropriate."

What's more, the news for borrowers continues to be bad – not just with higher interest rates. Added to that banks are getting much tougher on their lending requirements with some recently changing their criteria.

This will make it tougher for property investors, or people who want to put in as little equity as possible. In some cases banks have stopped doing 100% loans too.

There are a number of options borrowers can take at the moment. The high risk on is going short, say six-months or a year, in the hope that rates will be on a fast downward spiral by the time it comes to refix again.

At the other end of the scale you could take out a five-year rate, as they are the cheapest at the moment, with bank rates being around 65 basis points lower than one-year fixed rates. The problem with this strategy is that if rates start falling in a year or so borrowers will be trapped at the top end of the cycle and won't be able to get relief for quite some time.

Another option is to go for a mid-term rate of two or three years. This has some appeal.

Perhaps the biggest issue is that people refinancing their old two-year rate will be paying a lot more in interest than for the past two years and that will hurt. Secondly it means that any relief from the current situation is still two to three years away.

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