Mortgage rates are falling so how long should you lock in a fixed term mortgage for?
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 it expects the OCR to drop to less than 4% by the end of next year, and to 3% by mid-2027.
Infometrics chief forecaster Gareth Kiernan 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%, a two-year fix might be 5.5%, a three-year 6% and a four-year 6.1%.
Five-year fixes would be 6.3% and the floating rate would be 6.67%.
“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% 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% OCR could mean a one-year fixed rate of 4.9%, two- and three-year rates of 5% and four- and five-year fixes at 5.1%.
Sabrina Delgado, an economist at Kiwibank, said she expected the OCR to fall further than the Reserve Bank forecasts - she forecasts 2.5% 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%, possibly higher depending on how far term deposit rates fall.
“The last time we got to 2.5% OCR, before and after the earthquake, term deposit rates widened out to 4% and mortgage rates fell to 5.5%. Then the OCR fell to 1.75% in 2018, and we got 5% mortgage rates. Of course, all rates fell to the lowest levels in human history during Covid. Hopefully, we won’t see that again.”
ASB senior economist Chris Tennent-Brown said the bank expected the OCR to be 3.25% by the end of next year, when most fixed-term mortgages would be “comfortably under 6%”.
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% from 7.01% now to make fixing for two back-to-back six-month terms a better option than fixing for a year at 6.8%.
“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”.
Reserve Bank says leaving banks to their own devices hasn't worked.