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.