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 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.

The powerful Finance and Expenditure Select Committee has wimped out on an enquiry into interest rates charged by banks.

And Labour and the Greens are furious.

It’s no surprise really. Any such enquiry was likely to bear little, if any, fruit and goes to show that the authorities are reasonably powerless when it comes to influencing where interest rates should go.

If you think about it the MP enquiry was never going to win whatever decision they made.

If they found that the Australian-owned banks were “rorting” New Zealand, as the bank workers union Finsec alleges, what would they do? Introduce regulations telling banks where they could set their rates?

Fat chance. Robert Muldoon might have tried that, or you might see it in some communist state. In an open, free market economy like New Zealand, no way.

If they found that everything was fine, then they would get pilloried for being duped by the banks – which is what is happening but to a lesser degree by ditching the whole idea.

On top of all this any such enquiry would take ages. Banks are complex organisations and they operate in different ways. While the big banks use a lot of funding from offshore to fund their loans, other organisations like Kiwibank, TSB and SBS primarily fund their home loan book domestically.

In manufacturing terms the raw materials come from different sources and have varying prices.

A possible parallel to this sort of enquiry is what the Commerce Commission has done with mobile phone charges or its reports on electricity generation.

Lengthy, complex and reasonably fruitless.

An enquiry would also be a little awkward for the government too, considering it owns the bank, which until recently has been the market leader in lowering rates.

Kiwibank, like its Australian peers, didn’t pass on the last official cash rate cut. It last lowered its floating rate in February and the OCR was cut 50 basis points on March 12 and another 50 points on April 30.

The proposed MP enquiry was nothing more than a political stunt to make it look as though MPs were actually doing something to help the Kiwi battlers in the mortgage belt.

Right now people borrowing money can take heart that short-term rate are at historical lows.

This graph here shows very clearly that floating and one year rates are well below their historical five year average.

What’s more, there still seems to be some competition in the short-term maturities with some of the smaller institutions cutting six-month rates this week. No one, though, has beaten the low of 5.39% set by Westpac and HSBC.

Is it really time to revolt against the big banks?

Rod Oram argues here that it’s time we revolt against the big banks because they are “enjoying excessively healthy lending margins”.

While I respect Rod, I am not sure I can agree with his argument, and his proposition that we should all back Kiwibank.

Watching how lenders price their mortgages to customers is something we have been doing since 1992. One of the things which is clear is that home loan rates aren’t set on pure economics. They are also priced strategically for short-term business reasons.

For instance earlier this year when borrowers rushed to fix their loans for medium to long terms, the banks could not manage all the business. The best way to stop it was to increase the rates and make them unattractive.

The trouble here is some people didn’t see what was happening and I suspect ended up fixing at rates which in the long term won’t look like a great deal.

On the other side we see banks cut their rates simply to win market share. BNZ did this with its “Unbeatable” campaign a number of years ago, simply to gain customers. While it is impossible for other than those inside the bank to know, it seems the strategy was not particularly successful. Our analysis of market share over the years shows there were little gains for the bank and many consider the business written was only marginally profitable, if at all.

These days the BNZ isn’t a leader in price wars. Its strategy is to have one “hero” rate, branded under the “Classic” label to attract business. Right now it doesn’t even offer a “Classic” rate.

Then we come to Kiwibank. It has until recently been the leader in cutting rates, and has attracted a huge amount of new customers. Now it has the issue of managing all those customers and funding the business.

Clearly this is a big challenge. If you compare its rates to other lenders at the moment, it is not particularly sharp on price. This graph here shows that Kiwibank’s two-year rate is higher than the median for the big banks, while two other local institutions, PSIS and TSB are far more attractive.

Challenging the big banks and taking your business elsewhere is fine. There are plenty of alternative lenders other than Kiwibank. In the mix are SBS Bank, PSIS and TSB, which all offer competitive rates. There are plenty of other sound institutions, such as the building societies too.

New Zealand had, until recently, a large (in number) non-bank lending sector. That provided some good options for borrowers. Unfortunately the sector has been killed by the withdrawal of wholesale funding lines (from organisations including GE and ANZ). One of its big problems is that the money this sector used came out of Australia and across the ditch they love floating rates rather than fixed rates like we do.

The non-banks struggled to compete when Kiwis chased fixed term rates. The irony is that now floating is in vogue, the sector which was highly competitive to the banks has gone.

While we can all rail against the big banks and their profit margins, we should also be thankful. If these banks were less sound than they are, then the New Zealand economy would be in a much worse shape during this recession that it is now.

Rod is right, when you are looking to borrow money, consider options other than the big banks. There are plenty to choose from and in places like here,  you can compare them. From time to time there will be good deals, so look out for them.

Philip Macalister is the publisher of mortgagerates.co.nz and the NZ Mortgage Mag

TSB Bank has put out a very sharp two-year rate of 5.99%. In normal times you would expect its competitors to follow, but this isn’t normal times.

It seems the large banks are not interested in chasing new business at the moment and none have any plans to start doing so in the near term. I suspect, unless there is a big change in the market conditions, we will see very few of the traditional spring advertising campaigns.

Therefore the prospect of any price war around spring is low.

But we are in the middle of winter and it is solstice.

The lenders you would expect to compete against TSB, such as Kiwibank and BNZ are unlikely to move. BNZ is totally focused on getting money in the door, not lending it out. Kiwibank has so much new business and so many existing customers it is unlikely to match TSB.

In fact if you look at our rates table you will see Kiwibank has one of the highest two-year rates of any bank.

There is a lot of head scratching going on over the future of home loan rates this week. As I said last week the Reserve Bank is saying its base official cash rate is likely to stay around the 2.5% mark until 2010 and home loan rates should stay down.

However, the market is disagreeing with the central bank, and saying that rate increases will start early in 2010. A wrap of what the economists are saying, now they have had some time to digest the RBNZ announcement and review the market reaction, is here.

This split in opinion is quite critical for borrowers. Most experts, whether they are economists or mortgage brokers, are saying the best strategy at the moment is short-term rates. Go for six-month or one-year terms and look to roll them at maturity.

However, many comments to the previous Blog suggested going long makes the most sense at the moment. A couple things to consider are that long-term rates, particularly five-year rates, are sitting at their historical average and are very close to where they were a year ago.

Short-term rates are some of the lowest on record, and as this graph shows, are significantly lower than a year ago. Indeed the six-month rate is more than 400 basis points lower than this time last year.

The other bit of information to consider is that a couple of years ago a piece of research was done which suggested the best interest rate strategy is to use the one-year rate and roll over on that.

What’s happened in the past week?
During the week we have seen only one bank move its rates, that was Westpac, which increased its three and five-year rates 10 and 30 points respectively. The move keeps it in line with other banks, but still on the lower side.

The only lender to decrease rates was No 8 Mortgages. It looks good dropping its floating rate 100 basis points and some of its other shorter-term rates, while it raised long-term ones. However, readers should note No 8 is a specialist lender, so its rates aren’t directly comparable with the banks.

The only other lender to shift its floating rate was co-operative PSIS which increased its floating rate 20 points to 5.95% and keeps it as one of the best-priced in the market.

To check and compare rates go to www.mortgagerates.co.nz