YOUR MORTGAGE: Cash rate likely to rise in July

THERE has been little activity on the home loan front in the past week, with only minor positioning from banks and generally in the short term area from variable rate out to one-year fixed.
On the wholesale market, we have seen a flattening of the yield curve - with the short term rates being driven up by the Official Cash Rate (OCR), and the longer term rates easing marginally due to the weakness in the European and United States markets. Rates there are likely to stay down for quite a bit longer.
Locally, we have seen a drop off in business confidence and some sluggish consumer activity. We expect the Reserve Bank to push the OCR up on July 29 and probably again on September 16, but after that we may well see a pause to assess the effect of the increases thus far, especially if there are negative offshore developments.
In general terms, New Zealand appears to be far better placed for a sustained recovery than most countries - mainly being driven by strong demand for our key export commodities in Asia.
About to add to inflation is the Emissions Trading Scheme, which I believe is an inane piece of legislation to be pushing though at a time when the country is already under pressure.
New Zealand cannot afford to lead the world in solving global warming, especially when larger economies (and major contributors to global warming) have backed off, recognising that it is an inappropriate time to introduce such legislation - or are in fact refusing to introduce legislation completely.
There are many influences at play and they are not necessarily tugging rates in the same direction. The short term rates are almost directly affected by changes in the OCR, whereas the medium to longer term fixed rates are determined more by what happens overseas.
Therefore, with probably two 0.25 per cent OCR increases over the next three months and then perhaps a pause, we can expect the variable rate to go up over that period by 0.5 per cent.
On the other hand, increases in the medium to longer term fixed rates may be slower.
All this uncertainty, over the amount of the increases and the timing means that taking a mix of interest rates is a reasonably valid strategy - taking advantage of low short-end rates while still grabbing some certainty for 18 months or two years.
If you want to follow the variable rate up for all or part of your debt, then you should probably consider the one-year fixed instead. In most cases, it is only 0.5 per cent below the one-year fixed rate.
Therefore, if that 0.5 per cent benefit is going to disappear by mid-September, with further increases expected, then the one-year rate should provide a better overall cash benefit over the 12-month period.
At the end of that 12 months, you will have a similar decision to make - rates will be higher and it's a question of whether you follow the variable up at that time or look at other relatively short term rates.
 I favour a mix of rates to spread your cash flow risk and also your maturity risk when your rates expire.
Brian Berry is a director of Rothbury Financial Services, based in Tauranga. He can be contacted on: phone 0800 33 34 35, fax 07-5790666 or email brian@rothbury.net.nz