Mortgage rate news is a little like the weather at the moment. After experiencing spring sunshine under a big high pressure system, we then get buffeted by a low.

A week ago we rejoiced about short-term interest rates, particularly floating rates hitting levels we hadn’t seen before. Floating rates from the big banks are down as low as 5.69% after being in double-digits not that long ago.

This week the story is quite different. Long-term term interest rates have risen again and they look like going higher yet.

We’ve picked on Westpac to illustrate what’s happening as it is the main bank that hiked rates this week. However TSB Bank has also increased its three and five year rates to 8.20% and 8.50% respectively.

In this graph we have compared Westpac’s rates at the start of the year with its rates today and a week ago.

The picture is stark. Nine months ago the yield curve was flat and what economists would call slightly inverted – that is short-term rates were higher than longer term ones.

Today the curve is steep and positive with long term rates significantly higher than short term ones.

There are two messages in this story. The first is that it is pretty clear the only place to be is short term rates. Sure they will increase (probably around June next year), but there is a heck of a lot of increasing to go to flatten out the curve.

Secondly the forecast is that longer dated rates will continue increasing. We expect that other banks will follow what Westpac has done. ASB’s rates are already higher than Westpac’s rates. The former’s five-year rate is 8.60% compared to 8.49% for the Big Red.

Also history shows us that when one bank increases its rates others aren’t shy at following.

Backing up this view that longer term rates are on the rise is comments from economists. Many noted in their economic reports this week that there are signs international markets are slowly recovering. As that happens interest rate rises are inevitable.

In the past banks competed for your home loan business primarily over the two-year term, occasionally there were skirmishes elsewhere, but now it looks like the battleground is in floating rates.

In the past couple of weeks we have seen a number of lenders chop their variable rates to levels which are now at historical lows.

Home owners and property investors will be pleased, as it is bringing down their interest costs. People rolling off fixed rates onto floating are seeing their interest rates fall from around the 7.50% mark to 6% or less.

No doubt the Reserve Bank is happy too, as there has been a huge amount of criticism that banks hadn’t lowered their floating rates, even though the official cash rate had come down.

It seems pretty clear that the banks were increasing their margins on this business to levels which looked high when compared to recent historical data.

The cuts we have seen in the past fortnight back up this claim about fat margins and may well be seen as an admission from lenders that they were doing very well in this part of their lending book.

The current battle is different from previous ones and fascinating in terms of where lenders are positioning themselves.

First up, not all the banks have included themselves in this fight. In the past week it has been ASB, BNZ and Westpac who have joined in. Our biggest bank, ANZ National, has stayed out of it so far and made no meaningful changes; likewise the normal aggressor, Kiwibank, is sitting quietly at the moment.

With the competition, lenders have changed their position in the market since the start of this year. This table shows that in January BNZ’s standard floating rate was one of the least competitive, now it is one of the better on offer.

Likewise, ASB has changed its position on the league table too.

But to confuse the picture Westpac and BNZ have made their best offers in highly targeted products. Westpac has chosen its Everyday Choices revolving credit loan product as the one which it offers the best rate in.

This move is a little gutsy as many people don’t like or necessarily understand revolving credit (sometimes called line of credit) loans. One of the reasons is that they feel the balance owing can creep up quickly, increasing personal debt levels.

Meanwhile, BNZ has chosen its offset product, TotalMoney, as its lowest priced variable rate loan. Again, offset accounts are not widely used or understood in New Zealand.

Who do you believe about interest rates? The Reserve Bank or the financial markets?

The Reserve Bank governor Alan Bollard continues to reiterate his view that the official cash rate will stay at current levels until the end of next year, however the financial markets are pricing in increases for earlier in the year.

This stand-off is a situation I have commented on earlier. When the markets get to a turning point, like they are now, there is a tendency to predict that things will move in the opposite direction. Staying put never seems popular.

Bollard’s comment, which I agree with, is this: “The financial markets either want things to go down or they want things to go up, they just don’t seem to do stability very well, but they’re not necessarily right.”

He went onto say: “The market’s always got its own view and often it’s wrong.”

“We’ll come out with our views next week and as usual we will be absolutely clear cut about (our view on rates).”

Trying to understand what drives rates is pretty hard for mere mortals too. This has been shown at the unofficial Parliamentary enquiry into interest rates which is going on this week.

It seems not many submitters are sticking to the subject and a number of commentators are using it as a soap box for their economic views.

A graph we produced seems to suggest there is a prima facie case that banks are increasing their margins on floating rates. But are they ripping us off?

The question was put to Sam Knowles, the head of Kiwibank and no doubt the nemesis of the Australian banks. He was asked at the enquiry if the banks were “rorting” the system.

Surprisingly, he said no.

The whole enquiry has become a damp squib, made wetter because the four big banks turned down their invitations to attend, likewise the Reserve Bank is absent.

However, there is some information out this week which is useful to borrowers. It is the ASB’s Home Loan report.

The report discusses the pros and cons of various terms. A key point to remember is that when deciding what term to select for your home loan, you should be thinking about the cost of the loan over the long-term.

If, like most people at the moment, you are using short-term rates and rolling over, you can either choose to fix for longer terms, thus tying in a rate which is on the low side historically, or you can continue to use shorter-term rates and hope that the average cost over the long term is better than what you could lock in for say three years or more now.

The report gives a good example of five-year rates. Currently five-year fixed rates are 8.30%, while one-year rates sit around 5.50%. Clearly today the deal is a no-brainer. But one-year rates will increase and be higher when you come to refix next year. But will they increase by big enough margins to make the short-term option look unattractive?

The bank has done forecasts for the next 60 months and suggests even with the increases likely to come through on one-year rates, they still look like they will deliver a lower average cost over the five-year period.

The Bank of New Zealand hasn’t done anything normal in the home loan market for many years; and it doesn’t seem to have changed its ways recently.

The bank created headlines a number of years ago with its “Unbeatable” campaign. During this campaign it was the market leader pushing fixed rates, particularly in the two year space, down.

Part of the driver for the campaign was its decision not to distribute its home loans through mortgage brokers, even though brokers grew to control 40% of the market.

The logic for this move was from what you could call a domestic between the bank and brokers where it wouldn’t allow them to sell its popular Global Plus loan product which offered borrowers Air New Zealand Airpoints dollars.

Since then the bank has relied on its own mobile managers and branch staff. It claimed that these channels of distribution were more cost effective than brokers.

Well how things change. Last week all the chatter during the tea breaks at this year’s NZ Mortgage Brokers Conference in Wellington was about BNZ sacking all its mobile managers.

The bank has confirmed this to Mortgagerates.co.nz, but the reasoning is not so clear.

One of the theories is that the bank may replace its mobile managers with brokers. A second is that the bank’s parent, National Bank of Australia, has just bought the Challenger mortgage business. Challenger owns a group called PLAN which operates in New Zealand.

Maybe the bank will use all the PLAN brokers instead? However, PLAN says that isn’t part of the plan.

The question is what does BNZ intend doing in this space? For years it has aggressively chased market share, and its mobile managers are a key part of that programme.

The answer appears to be that BNZ is pulling back in the home loan market and will leave it to the other banks to fight for business.

It does seem an odd move. One thing that borrowers which seems likely is that the bank won’t be out there leading the market down with its rates. Or maybe it will be super-aggressive in cutting its rates to get customers into the branches?

The trend and the message in the changes to home loan rates in the past week have been clear and a little worrisome for borrowers.

As reported rates for terms of 18 months or more have risen, and the rises for three and four-year money have been steep. In many cases more than 50 basis points.

Shorter dated money rates have generally stayed static, however market leader Kiwibank and one of the building societies have cut their floating rates in the past week. (BNZ also made a cut to one of its loan products, Total Money, however Total Money is part of a product which includes some other elements. For this reason I don’t include it as a “standard” rate).

To see how the interest rate curve has steepened check out this graph showing Kiwibank’s new rates versus its earlier ones.

The worry is that short-term rates, while attractively low, aren’t going to stay around these levels forever. At some point they will start rising and when you look at the height of medium and short-term rates these increases could be a significant whack.

Borrowers who currently have their home loans of maturities from floating out to one year, will need to be watching what’s happening closely and reviewing their strategy.

One option to consider is leaping in and fixing some of your loan for a longer term – unfortunately the time to do that has, arguably, passed. While the three-year fixed rate is just below its average for the past five years, longer durations are now above their five-year average.

We will be watching these longer-term rates with interest to see if they have gotten too high. They have increased, mainly, because there are growing signs of economic recovery in offshore markets – particularly the United States.

However, there is no guarantee this pick-up will be a long-term constant trend. Indeed, many economists expect there to be hiccups to the economic recovery along the way. When these come there is a chance funding costs for home loans will drop back.

If this happens they may only be temporary and will give you small windows of opportunity to fix.

However, I wouldn’t bank on it as a strategy.

After many weeks of home loan rates remaining unchanged we have a movement. Today New Zealand’s newest bank, SBS, raised its six-month and one-year fixed rates by 10 basis points.

Now the increases aren’t big, nor do they put SBS out of the market in a competitive pricing sense. You can see here that with six-month and one-year rates of 5.60% and 5.70% respectively, they are some of the cheaper rates on offer.

However, they do break a drought. It’s not often we go for more than a month with no changes to home loan rates.

The significance of the change is that it is at the short end of the market, the terms that many home owners and property investors are currently using.

Now that someone has moved, attention shifts to whether other lenders will see this as an opportunity to follow suit and lift their rates too.

There is a strong possibility this will happen, but countering that argument is that SBS is a small player in the market and its influence may be less than if the changes were made by a big, High Street bank or Kiwibank – which often leads the market with changes.

No doubt the move will attract attention from fellow rate watchers who may well argue the hike in rates is unjustified as wholesale rates in these terms have traded within the current range for quite some time. Their argument will be that here we go again, banks ripping off the poor Kiwi borrower.

I have sourced a couple of graphs from ASB which show that the 90-day bill rate has remained pretty static over recent months and the official cash rate has flat-lined at 2.50%.

However, a look at various other swap rates shows that they have gradually been drifting upwards over time.

One of the more likely reasons that SBS has raised its rates is to do with the weighted average cost of its mortgage book. While short-term funding is pretty cheap at the moment, replacement funding banks are getting for their long-term money is far more expensive than before.

What is clear is that the home loan market is quite complicated at the moment and there are significant shifts taking place. This graph illustrates that although rates came down across the whole yield curve in the past year and became much cheaper than before, long-term rates are bucking the trend and heading upwards steeply.

This trend, plus a possible start of short-term rate increases presents a challenging situation for borrowers right now.