Homeowners with fixed mortgages due to roll over to a new term will have some tough decisions to make in coming months.
ANZ-National Bank yesterday was the first major bank to increase its floating mortgage rate in what is likely to spark a new round of rate hikes.
The bank lifted its rate 0.25% to 10.95%, despite the Reserve Bank last week keeping its official cash rate unchanged at 8.25%.
Other major banks have a floating rate of 10.7%.
Kiwibank has a floating rate of 10.45%.
Ninety-day bank bills, a key floating mortgage indicator, have been hovering around 8.87% this week.
Retail banks usually have a 1.5% to 2% margin between the bills and their floating rates.
Because their margins have been squeezed with the credit crunch, they have expanded the gap to recover costs.
Peter Smith Financial Services principal Peter Smith said the difference between fixed and floating rates was becoming very small.
On a mortgage of $200,000, the difference between a floating mortgage and a fixed two-year term at 9.7% was about $66 a month.
"That amount is significant for some people... For people who can afford it, I recommend they take a floating rate, put as much as they can into their mortgage and wait for the rate to reduce."
Often, banks applied a penalty payment to people seeking to pay extra on their fixed-term mortgages, he said.
If, as expected, the Reserve Bank started cutting its OCR in September, and continued cutting next year to 7.75%, the floating rate could go down to 9.75% without much trouble, he said.
Mr Smith believed the ANZ-National Bank had been told by its Australian parent that it was on its own as far as funding was concerned, as money became more expensive to borrow internationally.
Bank of New Zealand chief economist Tony Alexander said the case for potentially rapid interest rate cuts from late this year was growing.
"At the moment, fixed housing interest rates are well above average levels.
These two factors combined mean I would be extremely unwilling to sign up for a fixed rate term beyond two years.
Given our rates view, I'd be inclined to fix for just one year."
Doing so meant there was a good chance that when someone rolled off their near-10%, one-year term, floating rates would be near 9.5%.
That would mean they would be able to ride that rate down until early 2010 when fixed rates were likely to be 1.5% or more below their current levels.
