Indeed, the Reserve Bank cut the Official Cash Rate (OCR) by 50 basis points to 4.25% and signalled it would likely cut the rate by another 50 points at its next meeting on February 19.
Bolton believed many of the borrowers who floated their mortgages before the meeting would now have locked in fixed rates, as continuing to float until after the February meeting would be costly.
He typically advised borrowers to avoid floating for more than six or eight weeks.
Floating rates remain elevated and haven’t fallen by as much as fixed rates, which have expected OCR cuts in the future priced into them.
By the end of October, the average bank floating rate had fallen by only 70 basis points from its peak – about half the amount the average two-year rate had fallen by.
Bolton believed borrowers would feel more comfortable fixing for longer durations once mortgage rates got to the 5% mark.
He believed mortgage rates would fall to just below 5% if the OCR bottomed out just about 3%, as the Reserve Bank believes it will, by late-2026/early-2027.
This is the sort of rate that’s expected to have neither a contractionary nor expansionary effect on the economy.
So what does the flurry of relatively costly floating and shorter-term fixes mean for banks?
“They’ll love it,” Bolton said, saying the situation created a “temporary windfall” for banks.
He said that as interest rates fall, banks tend to make less money from deposits, so try to make more money from mortgages.
While bank profits are expected to fall in a lower interest rate environment, they remained high in the September quarter, with the average net interest margin dropping back from a tiny one basis point to 2.34%.
Coming back to the way people are structuring their mortgages, Reserve Bank governor Adrian Orr expected borrowers to soon start fixing for longer durations.
Fixing for two years has traditionally been a popular option among Kiwis, with banks competing relatively aggressively with their two-year fixed rate offerings.
Calculating whether you’re better off paying more to fix for a shorter duration, or less to fix at a longer term in the current environment, depends on how much further mortgage rates fall.
While the Reserve Bank expects the OCR to keep falling, two factors are limiting the extent to which mortgage rates will come down further.
Firstly, OCR cuts have been well signposted, so expected future reductions have to some extent already been priced into the fixed rates on offer.
Secondly, geopolitical uncertainty and US President-elect Donald Trump’s somewhat inflationary policies are putting upward pressure on wholesale interest rates, which can put upward pressure on New Zealand’s mortgage rates – longer-dated rates in particular.
The average interest rate banks collectively received for all their mortgage lending continued inching up in October to 6.39%.
While interest rates are falling, some borrowers who fixed for long durations during the Covid era are still refixing or floating at higher rates than they were previously paying.
Others might not be coming on to rates that are super low just yet, given the popularity of those relatively expensive floating mortgages.
Jenee Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
