Photo: RNZ
The official cash rate (OCR) has been cut and banks have trimmed many of their home loan rates.
But, with the OCR forecast to fall through the next couple of years, how far are mortgage interest rates really likely to drop?
And how long is it worth hanging out for a better deal?
As part of its updated forecasts, the Reserve Bank said in the latest monetary policy statement that it expects the OCR to drop to less than 4 percent by the end of next year, and to 3 percent by mid-2027.
Gareth Kiernan, chief forecaster at Infometrics, said he expected a 25 basis point cut at each meeting between now and the middle of next year, and a couple of cuts in the second half of 2025.
He said, plugging the bank's OCR track into Infometrics' interest rate model showed that by early 2025, a one-year home loan rate might be about 5.4 percent, a two-year fix might be 5.5 percent, a three-year 6 percent and a four-year 6.1 percent.
Five-year fixes would be 6.3 percent and the floating rate would be 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."
But he said if margins remained at their current levels, a 3 percent OCR could mean a one-year fixed rate of 4.9 percent, two- and three-year rates of 5 percent and four- and five-year fixes at 5.1 percent.
Sabrina Delgado, an economist at Kiwibank, said she expected the OCR to fall further than the Reserve Bank forecasts - she forecasts 2.5 percent in mid-2027.
But she said retail interest rates would be affected by what happened to term deposit rates and other funding costs.
"We would expect to see mortgage rates closer to 5 percent, possibly higher depending on how far term deposit rates fall.
"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, said the bank expected the OCR to be 3.25 percent by the end of next year, when most fixed-term mortgages would be "comfortably under 6 percent".
Wholesale markets have priced in another 75bps of cuts through the rest of this year.
To make it a better deal to fix for six months now rather than a year, the six-month rate would need to drop to 6.59 percent from 7.01 percent now to make fixing for two back-to-back six-month terms a better option than fixing for a year at 6.8 percent.
"If there's a 1:1 pass through from OCR cuts to the six-month rate, which is a bit of a heroic assumption," Kiernan said, "you would need two rate cuts during that time. Seems possible."