Borrowers – don’t panic

Borrowers shouldn't panic about the Official Cash Rate (OCR) increase to 2.75% today says ANZ chief economist Cameron Bagrie.  

Thursday, June 10th 2010, 12:47PM

by Jenha White

He says decisions borrowers make should depend on individual circumstances.

"If you want certainty take a short-term fixed rate, but acknowledge the cash flow cost. If you want the cash flow benefit, you're better off floating."

He says the floating rate will go up, but it will have to increase by a stunning amount before borrowers lose out.

BNZ chief economist Tony Alexander says in the next 12 months BNZ expects the average bank floating rates to be around 7%, and in the next two years 7.9%.

With the one-year rate average for the major banks at 6.35% at the moment and the two-year rate average at 7.3%, he says borrowers would be better off fixing, although there will be a cash flow cost.

However he sees there is also a risk that the Reserve Bank may not tighten as quickly as he predicts because of uncertainty in the recovery and Euro-zone worries.

"As a result, I'm still left flipping a coin on whether to fix or float," he says.

Squirrel Mortgage Brokers managing director John Bolton says the fact the OCR has come off the bottom rate is no surprise and he thinks going forward the Reserve Bank will have a soft approach.

"Nothing's changed for me as a result of the increase, I still expect a subdued market going forward and I'm encouraging people into floating to fixing 18-months."

He says the OCR change was already priced in for wholesale rates to go up and another increase would have to be expected to influence rates to continue rising.

Bolton says people are afraid that rates will go back up to 9% or 10%, but looking at the fundamentals and the global situation, he asks, what would get us there?

Bollard's hike is expected to capture a lot more homeowners than in the past, with the average mortgage duration sitting at around 12 months in March this year, while it peaked at almost two years in 2007.

The central bank said about 30% of mortgage holders are on floating rates, the highest proportion since the first half of 2004.

Reserve Bank data shows there has been a 79% increase in the number of residential loans on floating rates since April 2008, with the loans worth $53.7 billion.

There has also been a 21% decrease in the number of fixed loans since April 2008  with loans  worth $109.3 billion.

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