Unclear whether or when mortgage rates will drop (8/17/2008)

Despite widespread expectation that banks should be passing on reductions in the official cash rate with cuts in mortgage interest rates, Massey Director of Banking Studies Dr David Tripe says it is now very difficult to work out whether those hopes are justified.

"It is a very tricky question because the many issues relating to the sub prime crisis make it much harder now for analysts to judge the true lending costs banks are facing," Dr Tripe says. "Therefore it is very hard to judge whether or not the banks are able to pass on cuts in their interest rates at this time even though there have been suggestions that they should.

"As recently as 18 months ago the impact of changes in the official rate and other inter-bank rates was transparent because we understood the relationships around bank funding. This is no longer the case."

Although the official cash rate dropped at the end of July there has been very little reflection of this in the floating rates banks are offering borrowers, he says.

"Although there have been some movements in fixed rates, this could be seen as just window dressing on the part of the banks because they have raised specific funding with a corresponding maturity, and therefore subsequent changes in the market conditions are of no consequence. Realistically though, there is undoubtedly some pressure on banks at the moment, not because they are having difficulty accessing funds but because world-wide angst in the financial sector means banks are paying higher prices for their funds."

Although commentators are reluctant to forecast movement in floating rates any time soon, Dr Tripe says it is expected that many borrowers will be looking to refinance loans in the last three months of this year.

He says data from the Reserve Bank shows $50 billion in mortgages is due to be refinanced in the year from June. The high number of people refinancing at this time is due to the fact that many had taken out loans for a fixed period at particularly favourable rates offered by banks in previous years.

"We know a good chunk of that $50 billion is going to roll over in the last quarter of this year."

Note: This story has been adapted from a news release issued by Massey University

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