These costs have risen reflecting the increased spreads between offshore short-term funding rates and expected policy rates.  As shown by the chart below, these spreads have risen substantially during the crisis – peaking in late 2008 following the collapse of Lehman Brothers that triggered the greatest impact of the GFC.  These spreads have subsequently narrowed as central banks have provided increased liquidity and risk appetite has improved, but they remain above pre-crisis levels.  The new Reserve Bank liquidity rules mean that more funding must be sourced from offshore on longer-terms, which means that long-term fixed rates borrowed in NZ will more than likely be matched by long-term wholesale funding.  With most term deposit holders preferring shorter terms, there is increasingly less of a need for short-term wholesale funding.

These costs have eased from the highs seen in late 2008 – albeit to levels that are still significantly above those prevailing prior to the crisis.  Long-term wholesale funding costs are proxied (given the limited amount of recent bond issuance by New Zealand banks) by movements in Australian bank bond spreads, with a margin added to reflect the higher cost for NZ bank issuers.  Long-term wholesale funding has to increase under new Reserve Bank liquidity requirements – so longer-term fixed debt borrowed by a property investor in New Zealand, will more than likely need to be matched by borrowing this on the long-term wholesale funding market.  This market is more expensive, as the risks involved in fixing a rate for longer are (rightly in many people’s eyes) greater.  This new rule is a significant part of increasing the costs of long-term interest rates.

So there you have my answers with some help from BNZ Chief Economist Tony Alexander in his latest weekly overview, ANZ National Bank Chief Economist Cameron Bagrie with his February Property Focus, and the good people of the Reserve Bank of New Zealand.  As for what I am doing now on the debt I didn’t fix for 5+ years in March 2009, I am mixing it up a little bit between floating and taking 1 year rates.  In doing so I am paying from 5.25% to 6.15% (I like and have good success in negotiating discounts to interest rates with banks but that is another special topic that I prefer to reserve for my paid mentoring students).  With the ten year average interest rate across all categories (floating, 1 year, 2 year, 3 year, 4 year and 5 year fixed) averaging just under 8% now, I have big savings which I don’t blow on cars, lottery tickets or fancy holidays.  I use this money saved to repay debt, by paying down principal on loans.  Obviously if you have a mortgage on your own home, you should be paying down the principal on that firstly, as your own home’s debt is not tax deductible (I don’t want to know if you are one of the ‘special’ people renting their home from their own LAQC).  Once your own home is paid off, then you can tackle the debt on your investment properties later!