Photo Source: Adrien Olichon
The Reserve Bank of New Zealand (RBNZ) will make its first Official Cash Rate (OCR) announcement in three months, with market analysts predicting a reduction from 4.25% to 3.75%.
While such a decision would usually suggest a dip in borrowing costs, mortgage specialists caution that homeowners shouldn’t count on large reductions in mortgage rates. Banks have already moved their rates in preparation, leaving little room for further cuts.
Why the OCR Cut Won’t Mean Cheaper Mortgages
Jose George of Tella Home Loans has cautioned that a lower OCR may not lead to major changes in home loan rates, as many banks have already priced in the expected cut. “A lot of the banks have already adjusted their mortgage rates in recent weeks, in anticipation of a lower OCR,” George explained.
Westpac has reduced its three-year fixed mortgage rate to 4.99%, while BNZ and ASB have cut their two-year rates to 5.29%. George doesn’t expect significant further reductions, despite these moves, “We are not going to see too much movement from the banks,” he said.
Short vs. Long-Term Fixing
Homeowners are adjusting their focus to fixing strategies. Short-term fixes, particularly for one year or less, have been popular in recent months. However, as the OCR is expected to dip to 3.25% later this year, experts predict that more borrowers will shift to slightly longer fixes.
Jose George believes that the majority will opt for 18-month to two-year terms, avoiding the three-year commitment, even with Westpac’s enticing 4.99% rate. “Three years is a long-term commitment, and most customers in New Zealand tend to fix around the two years. Two years tends to be the sweet spot,” he noted.
Where Are Mortgage Rates Headed Next?
George expects home loan rates to remain in the 5% to 6% range in this cycle even with the anticipated OCR cut. He argues that borrowers need to adjust their expectations after the record-low rates of 2020 and 2021,
“After 2020/21, people got used to cheap money. It has taken people a bit of time to come back to the reality that 5% to 6% is usually where the market sat anyway,” George said.
The RBNZ’s Next Moves
The RBNZ’s Monetary Policy Statement, released alongside the OCR decision, is expected to provide crucial insights into the future economic direction. This will help determine whether the central bank plans to push the OCR as low as 3.25% by year-end.
“That could give you a sense as to whether they want to ride their way to 3.25% by the end of the year, because that impacts a lot of things again, especially on the floating rate,” George said.
Market analysts, including the NZIER shadow board, suggest the OCR could settle somewhere between 2.75% and 3.5% over the next year.
What Homeowners Should Keep in Mind
While an OCR reduction is expected, it doesn’t automatically mean lower mortgage rates. Banks have already adjusted their rates in anticipation of the move, leaving little room for further reductions. Homeowners should focus on choosing the right mortgage term based on their financial situation, rather than waiting for another drop in rates.
Experts are forecasting a mortgage rate range of 5% to 6%, which may prompt borrowers to reconsider long-term affordability. With ultra-low interest rates in the past, making strategic mortgage decisions is now more crucial than ever.