Caution urged on mortgage rate drop

Top economists are warning potential home buyers to proceed with caution as another bank drops its variable mortgage rate to the lowest in 40 years.

BNZ announced yesterday a 0.26 drop in its TotalMoney variable housing rate, making it the lowest variable home loan rate available in the market at 5.59 per cent. This comes one week after rival ASB Bank dropped its floating rate to 5.75 per cent and just days after Westpac dropped its floating rate to 5.69 per cent.

But before potential home buyers rush out to purchase a new home, economists are warning the low rates won't last.

Massey University banking studies lecturer Clair Matthews says borrowers need to consider if they can afford their mortgage at a higher rate before they take advantage of what is on offer now.

"I wouldn't want people to go out and borrow money that they wouldn't have borrowed otherwise," she says.

"The variable rate is at a record low and we have to expect that it will go back up."

Mrs Matthews says the upward shift may not happen in the next few weeks.

"But it is a matter of months rather then years."

This view is supported by Shamubeel Eaqub, a senior economist with the New Zealand Institute for Economic Research.

"When we look down two or three years, we expect levels to go higher, to reach a more normal level."

Mr Eaqub says home buyers should expect the floating rate to return to around 7 per cent.

He says the announcements from the two banks reflect a little bit of competition to get new customers.

"I don't think we will see the mortgage rate wars of 2004 and 2006. The conditions are different and I'm not sure there is the same demand."

Mr Eaqub says the fragile labour market and reduced access to credit means this will be a niggle rather then a full-blown competition between banks.

Chris Bayliss, director of retail at BNZ, points out the most recent cut is part of an ongoing trend.

"Over the past year we've reduced our variable loan rates by 4.90 per cent to ensure that we offer New Zealanders competitive rates which will enable them to reduce the principle on their loan at a quicker rate."

ASB retail banking chief executive Ian Park says he doesn't believe we are seeing a return of the mortgage rate wars of the past.

"We have always said when the cost of funds reduces we will pass that on to our customers. We fund off short-term funding rates as well as onshore and offshore funding rates. These have come down recently and so we have passed on the saving. We have been consistent."