A mortgage adviser has warned borrowers not to get sucked into recent cuts to longer-term home loan rates.

Last week Westpac became the first major New Zealand bank to start cutting its mortgage rates, but
did so to only its longer term rates from two years to five years.

The bank lifted its three short-term rates (six months, one year and 18 months).

But Loan Market’s Bruce Patten said the cuts were irrelevant.

“An early Christmas present you might call it but it’s a wolf in sheep’s clothing, in my opinion.”

Patten said no one was fixing for two, three, four or five years at the moment.

“I’d be asking the question why aren’t they cutting all of their rates given where the wholesale rates sit overseas,” Patten said.

“We’re talking some really significant cuts in the last three to four weeks. Some of them have dropped almost a percentage since late October.

“But equally the short-term wholesale rates have also dropped.”

Westpac defended its move in a statement to the Herald, saying the cuts were meaningful for borrowers.

“Our two-year rate remains a popular term… our special 6.99 per cent offer is the leading advertised rate among the five main banks on that term,” a Westpac NZ spokesman said.

“Changes to the three to five-year rates are meaningful for borrowers looking to lock in longer-term certainty, and we believe our one-year rate is still very competitive.”

The spokesman said funding costs were driven by a range of factors.

“While wholesale interest rates have fallen in the past month, they remain volatile, and strong competition for retail deposits is working against that, particularly on shorter-term rates.”

Patten was less convinced.

“I would hope that it’s not going to encourage people to fix long term when we’re at what we would call a peak in the market,” he said.

“Don’t get sucked in by the lowest rate.”

Patten said he’d be “really disappointed” to see further short-term rate hikes from banks “when you look at the cost of funding to them”.

Squirrel founder and head of mortgages John Bolton agreed, saying all the action was in short-term rates at the moment.

“Long-term fixed rates… no one’s doing it.

“When you’re at the top of an interest rate cycle… what you tend to get is more people go onto floating and short-term fixed rates in anticipation that rates will drop next year… which means the vast majority of what the banks are writing at the moment is in the one-year fixed rate,” he said.

“So that’s the one they’re going to try to get as much margin into as possible.”

He said one-year rates at most banks were hovering between the 7.39 per cent and 7.45 per cent mark.

“So they’re within a very tight band now.”

Bolton said only two things are going to drive shorter-term rates down.

“One is competition and the other is a drop in the OCR [official cash rate].

“As soon as it becomes apparent that the OCR is on a downward track you’ll start to see that response coming through in those short-term fixed rates.”

But Bolton said he wasn’t expecting that to be the message next week when the Reserve Bank publishes its quarterly monetary policy statement (MPS).

He said we could see the first fall in a short-term mortgage rate as early as March.

“That would be driven by the Reserve Bank’s monetary policy in February, maybe with a projection that they see the OCR coming down earlier than they’ve previously forecast,” Bolton said.

“It won’t require an actual OCR change, but what it will require is a pretty clear signal that they’re dropping relatively soon.”

Most economists now agree the next move is down for the OCR, which has been on hold since July.

Bolton said the other side of the conversation was term deposit rates.

“The other thing to look at is the one-year term deposit rate. You’d need to see that dropping to also be a bit of a lead signal that you’re going to get a bit more competition coming through on those short-term housing rates,” he said.

Nathan Miglani, managing director and head of lending at NZ Mortgages, said the drop in rates was promising.

“The rate adjustment on longer-term loans is promising, indicating a light at the end of what has been a very long tunnel,” Miglani said.

“Our advice remains consistent: consider short-term fixes of one to two years, as we anticipate two rate cuts next year. This will allow for flexibility to lock in much lower long-term rates when they become available, allowing you to avoid high breakage costs.

“Nonetheless, opting for longer-term fixes at these reduced rates now also offers a more viable peace-of-mind solution.”

Cameron Smith is an Auckland-based journalist with the Herald business team. He joined the Herald in 2015 and has covered business and sports.