PHOTO: Mortgage rates. FILE
The official cash rate (OCR) has been reduced, leading banks to cut many of their home loan rates. However, with the OCR forecasted to continue falling over the next couple of years, how much will mortgage interest rates actually decrease? And how long should borrowers wait for a better deal?
What does the OCR drop mean for NZ mortgage borrowers? | WATCH
The Reserve Bank’s latest monetary policy statement predicts the OCR will drop to below 4 percent by the end of next year and to 3 percent by mid-2027. Gareth Kiernan, chief forecaster at Infometrics, anticipates a 25 basis point cut at each meeting until mid-next year, followed by a couple of cuts in the second half of 2025.
By early 2025, Kiernan’s model suggests a one-year home loan rate could be around 5.4 percent, a two-year fix at 5.5 percent, a three-year at 6 percent, and a four-year at 6.1 percent. Five-year fixes might be 6.3 percent, with the floating rate at 6.67 percent.
“However, two caveats to these numbers. Firstly, the Reserve Bank doesn’t publish any other interest rate forecasts, so I’ve kept our longer-term wholesale rate forecasts, which see a 10-year government bond rate of about 4.2 percent in early 2027 – a rate that is no lower than the current rate. This component limits the fall in longer-term fixed rates.
“Secondly, bank margins look to be unusually low on retail mortgage rates at the moment, which might be a function of weak demand for borrowing, which is encouraging banks to price their rates more sharply to get lending out the door. I’ve assumed that these margins are restored back towards normal over the next 18 months, meaning that banks pass on less of the interest rate cuts to borrowers during that period.”
If margins remain at current levels, a 3 percent OCR could result in a one-year fixed rate of 4.9 percent, with two- and three-year rates at 5 percent, and four- and five-year fixes at 5.1 percent.
Sabrina Delgado, an economist at Kiwibank, expects the OCR to fall further than the Reserve Bank forecasts, predicting 2.5 percent by mid-2027. However, retail interest rates will depend on term deposit rates and other funding costs. She anticipates mortgage rates to be around 5 percent, possibly higher, depending on the term deposit rates.
“The last time we got to 2.5 percent OCR, before and after the earthquake, term deposit rates widened out to 4 percent and mortgage rates fell to 5.5 percent. Then the OCR fell to 1.75 percent in 2018, and we got 5 percent mortgage rates. Of course, all rates fell to the lowest levels in human history during Covid. Hopefully, we won’t see that again.”
Chris Tennent-Brown, a senior economist at ASB, expects the OCR to be 3.25 percent by the end of next year, with most fixed-term mortgages “comfortably under 6 percent.”
Wholesale markets have priced in another 75 basis points of cuts through the rest of this year. To make fixing for six months a better deal than fixing for a year at 6.8 percent, the six-month rate would need to drop to 6.59 percent from 7.01 percent now. If there’s a 1:1 pass-through from OCR cuts to the six-month rate, it would require two rate cuts during that time, which Kiernan believes is possible.
SOURCE: RNZ