How low will mortgage rates go and why we could see a sub 4% rate

With another Official Cash Rate decision looming this week, how much lower could mortgage rates fall? Photo / Alex Burton

Homeowners could see sub-4% interest rates in the next six months, according to one mortgage expert.

Banks began dropping home loan rates below 4.5% last week in anticipation of the Reserve Bank (RBNZ) cutting the Official Cash Rate (OCR) on Wednesday.

The major banks are currently offering fixed one-year terms of 4.49% after cuts by as much as 26 basis points (bps).

Nathan Miglani, managing adviser at Squirrel mortgage brokers, said last week’s moves were a bit of a surprise.

“If you look at the last 12 months, whenever there was an OCR drop, the [one-year home loan] rates have sort of dropped by 10-15bps, but that’s the first time we’ve seen the majority of the banks drop their rates by 25bps.

“That’s actually quite huge… if you look at a few weeks ago the best one-year rate was around 4.79%.

“It’s telling me that everyone was predicting a 25bps [OCR] drop, but now a lot of people have started to question whether the RBNZ’s going to drop [the OCR] by 50bps now and maybe hold in November.”

Miglani said he would not be surprised to see a one-year mortgage rate of 3.99% in the next six months.

“That’s definitely on the cards,” he said.

“With the way things are going and what we are sensing, business confidence is still low, the GDP last quarter didn’t help… I reckon now to move people back to start spending money on hospitality, retail, I think the rates need to be sub-4%.

“And that’s the reality of the market.”

He said Covid had changed people’s expectations around interest rates.

“Historically sub-5% used to be a good rate to get people moving again, but with the reality of the market now, sub-4% will be the rate that will start moving people again,” Miglani said.

Bruce Pitchers, Canstar NZ editor, said he didn’t expect to see a sub-4% rate any time soon.

“Last time rates went below 4% was back in 2019, when the OCR was cut to 1%,” he said.

“If we get a 50bps cut on Wednesday, and an indication that the RBNZ expects to lower the OCR, we could see a further reduction in shorter-term mortgage rates going into summer, perhaps down a further 10-25bps.”

Pitchers said longer-term rates of two years and over aren’t going to fall much further and could start to rise over 2026.

“Banks have been revising their forecasts down slightly for shorter-term rates for the past few months, but all see us at bottom of [the] rate cycle at the moment.

“Ongoing uncertainty about further OCR [cuts] does give those hoping for lower rates more time to decide about fixing longer.”

Pitchers said since the beginning of this year, there has been a huge spike in the number of people taking out shorter-term mortgages of a year or less.

“Back in March, the amount lent on one and two-year fixed rates was pretty similar, but in August over twice as much was lent on one-year fixed than two-years, and three years fixed was even less popular,” he said.

“This is understandable, given the successive cuts to the OCR and people holding out for lower rates.”

Markets have priced in another OCR cut on Wednesday as a certainty, but uncertainty remains around the size of the cut.

ASB economists recently said the fire of recovery requires more accelerant, suggesting the OCR needs to go lower than recently thought – to a low of 2.25%.

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Cameron Smith is an Auckland-based business reporter. He joined the NZ Herald in 2015 and has covered business and sports. He reports on topics such as retail, small business, the workplace and macroeconomics.