KEY POINTS:
Interest rates are unlikely to start heading down until some time next year, says ASB, so it makes sense to fix a home loan for two years.
Reserve Bank Governor Alan Bollard has raised the official cash rate three times since March, pushing variable mortgage rates over 10 per cent for the first time since 1998.
Longer-term rates have risen, too, reflecting higher international interest rates.
Fixed-term mortgage rates have risen by the best part of a full percentage point since the start of the year.
"The five-year rate is now nearly 9 per cent and no longer offers much of a hiding place from the Reserve Bank's efforts to make borrowing more expensive," ASB chief economist Nick Tuffley said.
Those higher fixed rates make it less likely that the Reserve Bank will need to raise the OCR again.
Even so money market pricing implies a better than 50 per cent chance that Bollard will raise the OCR some time this year.
"You want to protect yourself in the short term from any risk of higher rates but you don't want to lock yourself in for too long," Tuffley said.
"So the question is how long to fix for so that when you roll off you face more palatable choices."
A one-year rate locked in now would mature at about the time ASB expects the Reserve Bank to be starting to cut interest rates.
But it may turn about to be later than that. The Reserve Bank is still forecasting inflation of 2.8 per cent in 2009, leaving it with very little headroom to tolerate any further developments like the Fonterra payout forecast that imply stronger inflation pressures.
The two-year rate had the advantage of being below the expected average for floating rates over the next two years and there was a reasonable chance that fixed rates would have dropped by the time the loan matured, he said.
"Though the five-year rate may have some appeal due to the fact that it is still the lowest on offer, we suggest steering clear of that term now if the level of the rate is your primary consideration," Tuffley said.
It was well above ASB's forecast of what the one-year rate would average over the next five years.
"There is a strong likelihood of missing out on the opportunity to benefit if fixed rates do decline within the next one to three years."
ASB's VIEW
* Interest rates stay high this year.
* Falls next year remain on the cards.
* Fixing a mortgage for no more than two years looks the best bet.
