Interest rates are being influenced by domestic as well as international forces.

In April 2009, the OCR was reduced to 2.5%. The easing cycle which lasted for less than one year reduced the rates to historic low from a high of 8.25%.  Although the OCR has direct influence on floating rates and short term fixed rates, the longer term rates also dropped significantly around that time. Even the 5 year rate, the longest fixed rate term offered by majority of banks stayed at around 6 to 6.5% per annum for a short period of time.

Since then, the fixed term mortgage rates have been on the rise. The longer term rates have risen quite steeply. In fact the 5 year rate is now around 8.75%, which is only slightly below the rate of 9.45% prevailing at the time, the easing cycle began.

In 2010, OCR is likely to go up. Most economists are expecting the OCR to be between 4 and 4.50% by the end of 2010. This rise will directly influence floating rate and shorter term fixed rates.  So the gap between shorter term and longer term rates is expected to narrow down over coming months. The longer term rates may also rise but the rise will not be as steep as the rise in shorter term fixed rates.

It is difficult to determine as to when the RBNZ will start raising OCR, though the governor has said that it will be kept at these levels till the second half of 2010. But the housing market is showing signs of resilience over past few months. The number of days to sell houses has gone down; the net immigration is on the rise, the house prices are going up. It is definitely an encouraging sign. But RBNZ may not like it. If the inflation in house prices persists, the RBNZ governor may raise the rates sooner than expected. Remember the recovery in house prices is there even though the banks are not lending aggressively. The lending criteria of majority of lenders are quite tough. If the loans become easily available, there will be further house price inflation.

International picture is quite confusing. Australian economy is showing signs of growth. USA and Europe are still not out of woods. Some of the economists fear that there may be double dip in second half of 2010 in US. This may delay the global recovery and will not put upward pressure on interest rates. But on the other hand, to stimulate the economies, different governments have been providing too much liquidity in the system and ultimately inflation is going to be a problem. It may not seem to be a problem immediately, but definitely it is going to be. Also, over next few years, different governments will be borrowing heavily. This will put upward pressure on interest rates.

Although there is no clear cut suggestion, for those who can take risk of fixing at higher rates in future, rates for 12 to 18 months seem to be better option as the picture will become quite clear by that time. For conservative investors, split policy is best, fixing different amounts for different fixed rate periods. 

Remember, fixing for longer term gives more certainty but fixing for shorter term or keeping your loan on floating gives more flexibility.

Note: The interest rates quoted are at the time of writing on 10.01.10. The article is for general guidance only. Please consult your financial advisor before taking any decision.

Ravi Mehta is an Auckland based Financial Advisor and can be contacted on ravi.mehta@pfsl.co.nz
A disclosure statement under Securities Markets Act relating to his services is available on request and is free of charge.