Brian Berry - Financial Advisor
	Straight forward, quality financial advice - so you can get on with the fun stuff in life. Click to view Rothbury's website.

The answer is probably 'yes'. We have had what could be termed a 'defacto tightening' of interest rates as the last week has seen a lot of action in the wholesale and home loan interest rate markets - unfortunately in the wrong direction - upwards!

The reason was that the market was taken by surprise by two things last week - an address made by the Governor of the Reserve Bank that was very positive as to where the economy was placed at present and basically validated market pricing, therefore heightening the expectation that the OCR (Official Cash Rate) will probably be increased on June 10. The second occurrence was the far better than expected employment data.

This has already had the same effect for borrowers as though the OCR was increased.

As market interest rates are all about the expectation of where rates are likely to go, the wholesale market reaction was pretty well instantaneous with the short term rates - 90 days out to two years climbing quite quickly. The flow-on into retail rates was quite fast also with several of the main banks raising their fixed rates in the six month to two year space very quickly. Some banks still offer specials within that range, but in general terms rates have increased.

From a borrower's point-of-view, whilst you may have to now pay up to 0.25 per cent more for your home loans (if fixing for terms up to two years) and that is disappointing, getting the timing right to lock in always proves difficult. The Reserve Bank's apparent validation of the financial markets' pricing in of successive 0.25 per cent increases in the OCR means that mortgage rates are likely to also move up in 0.25 per cent increments so the difference in actual dollar terms if you miss out on a lower rate is not necessarily too great.

An overall increase in the OCR of 2.5 per cent is what the markets are currently pricing in for just over the next 12 months, taking the OCR from its current 2.5 per cent to five per cent. You would expect to see the variable rate increasing by a similar amount, taking it into the early to mid eight per cents.

Other than riding the increasing cycle out on a variable rate or shorter term fixed rates, most people like reasonable certainty and for a decent period. An 18 month fixed rate takes you from now through to the end of 2011 and a two year rate through to almost mid 2012. Interest rates are likely to peak late in 2011, but how they will remain elevated after that is a moot point and no-one, not even the Reserve Bank knows that. You must position yourself to be paying significantly higher rates for a period after that, but hopefully knowing that the downward leg of the cycle is not too far away.

The 18 month rate is better priced than the two year rate, but provides certainty for less time. I still favour a reasonable portion of certainty and therefore the 18 month and two year rates come into play if you require that certainty for a reasonable period or you can take a mix of those rates, depending on how much certainty you want. I have generally favoured the two year rate as it provides that certainty for a longer period, albeit at a reasonably higher cost

While we are on a 'horsey' theme, for those that want to have a bet each way, a mix of the variable, the 18 month and two year rates could be a good option.