KEY POINTS:
A few months ago I surveyed the market for term deposit rates and mortgages to see who had the best deals and whether to opt for long or short-term savings accounts and loans.
So much has changed since then it's worth revisiting this area, in particular the ideas fixed mortgage rates will always be cheaper than variable rate mortgages and finance companies are too risky to invest in. So what's changed?
Firstly, the Reserve Bank has slashed the official cash rate from 8.25 per cent to 6.5 per cent in the past 3 months, including the unprecedented 1 per cent cut on October 23. Most economists are saying it will be cut again to 6 per cent on December 4.
Secondly, the Government has plans to guarantee deposits worth up to $1m in banks, building societies, finance companies and credit unions. The scheme isn't finalised, but is expected to run for at least two years.
Finally, the economic news in the past month has been awful. Business confidence crashed, retail spending was weak, home construction slumped and new lending has dried up.
Economists are forecasting a longer and deeper recession and are rapidly cutting their forecasts of where the OCR will bottom out. Some say it could fall below 4 per cent by the end of next year.
All these factors have transformed the equations for borrowers and savers.
Term depositsWhere once finance companies were a risky prospect with higher interest rates, they are now as safe as the Government and offer higher interest rates.
The likes of South Canterbury Finance, Marac Finance, Allied Nationwide and Fisher & Paykel Finance are all offering 9 to 10 per cent from one to two years. All applied for the guarantee and are certain to receive it.
Meanwhile, the banks are offering no more than 6.75 per cent, but are in effect just as "safe" as the finance companies.
It makes sense to put savings with a finance company, but not for terms any longer than 18 months to two years because the guarantee is likely to be withdrawn or changed after that.
I'd stick to the highest-rated finance companies mentioned above. Getting money from the Government would not be easy or fast in the event of a collapse. Also move quickly.
The finance companies are likely to lower their interest rates closer to the bank rates when they have filled their coffers and have run out of places to lend on the deposits, which is already happening quickly.
Mortgages Fixed and variable rate mortgages have dropped and the gap is narrowing. Variable rates were as much as 3 per cent higher than fixed rates but that gap is about 2 per cent and falling.
It's still cheaper to go with a fixed-rate mortgage, particularly the one-year rates being offered by many banks.
But there is now a serious risk a two-year fixed rate taken out now would be higher than a variable rate in the mortgage's second year. The OCR is expected to drop to about 4 to 5 per cent by the end of next year. Given variable rates are typically about 3 per cent above the OCR, this means the variable rates could be about 7 to 8 per cent by then.
Currently Kiwibank and the big banks are offering around 7.9 per cent for their one-year rates and about 9.5 per cent for their variable rates. It makes sense therefore to go for the one-year rates and then aim to pick up the lower variable rate when the one-year rate expires.
* Bernard Hickey is the managing editor of www.interest.co.nz; a website for investors and borrowers wanting free and independent news and information on interest rates, finance companies, banks and the economy.
