Lenders are offering home-owners the lowest short-term bank mortgage rates in New Zealand history as they compete to lure customers before an expected rise next year.
Westpac, BNZ, ANZ and ASB have all dropped their one-year interest rates below 5 per cent in the past week before the Reserve Bank puts a cap on the skyrocketing housing market, economists say.
David Chaston, of financial news website interest.co.nz, which compares rates, said banks were "unbelievably competitive" at present.
"The banks themselves have special deals for special-interest groups.
"They sometimes end up with 25 basis points off the published rates. So the trick is to go in there and negotiate hard, and they are very receptive to it at the moment."
Yesterday, Westpac became the market leader for fixed one-year home-loan rates when it launched its "special" 4.94 per cent deal, down from 5.19 per cent.
It is available to borrowers with at least 20 per cent equity in their property and a minimum loan of $100,000. For two weeks in February, it offered a rate of 4.89 per cent, which was the lowest in history.
ANZ launched a one-year 4.95 per cent offer on Monday, matching BNZ's move on Friday, and ASB did the same yesterday.
Insurance companies are also jumping on the bandwagon, with Sovereign Home Loans due to lower its rate to 4.95 per cent from 5.19.
Mr Chaston said the country was also seeing a record-low two-year rate of 4.99 per cent, which is offered by a number of banks.
This year, Kiwibank had a 4.79 per cent six-month rate, which was the lowest bank fixed rate of all time.
House prices are soaring around the country - with the average price of an Auckland city home hitting $735,692, up 12 per cent over the past year and nearly 8 per cent on the 2007 peak.
The International Monetary Fund has said housing here is overvalued by about 25 per cent.
New Zealand Institute of Economic Research principal economist Shamubeel Eaqub said when one bank dropped its rate, others typically followed within a week.
He was unable to predict what one-year fixed rates might rise to, but said floating rates might rise from less than 6 per cent now to 7.5 by the end of next year.
The Reserve Bank will likely hike the Official Cash Rate next year, which would have a major influence on short-term interest rates when combined with new tools announced in the Budget this month, including restrictions on the share of high loan-to-value ratio loans, Mr Eaqub said.
The OCR had been at 2.5 per cent for more than two years but is likely to be at 2.75 by January and between 3.75 and 4 by the end of next year.
"Right now, the Reserve Bank is very concerned with rising house prices in Auckland," Mr Eaqub said.
"When house prices stretch too far from incomes, they might fall if there is an economic shock. In the USA and UK, real house prices fell by 30 per cent, peak to trough, in the latest recession. Such an adjustment can have significant ramifications for the financial system, household wealth and economic activity.
"Over the next year, the cost of borrowing is likely to go up and banks may be able to lend less."
Mr Eaqub said the economic setting was not yet right for higher interest rates because there was little inflation. The Reserve Bank's target was between 1 and 3 per cent, but inflation was 0.9 per cent a year.
"So the RBNZ will want to encourage banks to be more cautious in their lending. They do not want to see competitive reductions in mortgage rates fuelling a bubble."
The bank had limited impact on longer-term interest rates as most money was borrowed from overseas markets, as opposed to short-term funds, which were borrowed locally.
Mortgage broker Tracey Wraith said she advises people to spread their loans over different terms, so they're not "over-exposed" to one rate or one term.
"Outside influences, such as the Christchurch earthquake, America being downgraded and the European market uncertainty, have delayed the Official Cash Rate increase."