ASB cuts long term mortgage rates, but short term rates will cost more

ASB has dropped its longer-term home loan interest rates, but increased its shorter term loan rates.

ASB dropped its three-, four- and five-year home loan rates, and raised its one- and two-year rates.

The bank’s five-year rate for mortgage borrowers with at least 20% equity is now 6.49%​ compared to its one-year rate of 6.84%​, and two-year rate of 6.79%​. Its three-year rate is 6.69%, and its four-year rate is 6.59%.

Freelance economist Tony Alexander​ said under-pressure borrowers coming to the end of fixed-rate home loan periods, might be attracted to the longer-term home loans.

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They may be tempted to lock in for longer periods in return for being able to make lower weekly repayments than they would on shorter term loans, he said.

“People will do it for cashflow reasons,” Alexander said, noting high inflation was leading to tough times for many households, with food prices alone up 11.3%​ last year, the fastest increase since 1990.

But borrowers who locked in for four or five years ran the risk they would regret their decision in several years, if inflation fell, and short-term loan rates reduced, Alexander said.

Alexander said if he were refixing a home loan at this time, he would do what he did in 1998 and 2008, and refix for a short period, and hope loan rates would start falling soon.

“I would take the pain of staying short, and ride down the falling interest rates. I would not be touching the five-years with a barge pole,” he said.

Alexander was surprised ASB had moved before updated inflation figures were published.

The bank’s rates changes mean it now has the highest one-year rate of the big banks, and the lowest five-year rate, which it had cut by 50 basis points from 6.99% to 6.49%.

ASB economist Mark Smith said the historical lesson for borrowers was that central banks needed to stay the course until they were confident inflation would settle at acceptably low levels.

“We won’t know whether the Reserve Bank has done enough for a while yet,” he said.

“However, current inflation is much too high, and price rises still look entrenched, with inflation not yet heading in a direction consistent with the 1% to 3% inflation target.

“The more done now, the lower the risk of having to play catch-up later on. Hikes now can also be reversed later if need be. We expect a 75 basis Reserve Bank hike in February, but note future OCR hikes will be increasingly data dependent,” he said.

A 75 basis point rise would take the OCR from 4.25% to 5%.

“Growing downside risks to the medium-term inflation outlook also point to potentially bringing forward the OCR cuts we expect from August 2024,” Smith said.

The yield curve was likely to remain heavily inverted until the OCR was eventually cut, he said.

Alexander said the ASB rates reshuffle came after a period in which bank margins on home loans had increased, especially on longer-term loans.

The cost to banks of funding longer-term loans had also fallen.

Alexander said ASB’s move would have been driven by falling sales as fewer properties were changing hands.

In 2021, the annual number of homes changing hands was about 100,000. That fell to 62,400 at the end of last year.

“A decline towards 55,000 is now looking very likely,” Alexander said.