Winter is coming for mortgage rates – how low can you expect rates to go?

A mortgage expert says home loan rates probably haven’t got a lot further to fall. Photo / NZME

Mortgage experts expect home loan rates to bottom out this winter as some home owners hang onto the possibility of lower rates.

The past year has seen the majority of mortgage holders opt for floating or short-term fixed rates in anticipation of banks cutting interest rates.

But Squirrel founder John Bolton said the number of those taking up longer-term rates was increasing as we approached the bottom of the current cycle.

“Rates probably haven’t got a lot further to fall.

“The Reserve Bank is forecasting the Official Cash Rate [OCR] to get to 3% by the middle of the year ... that’s largely going to impact your really short-term floating and fixed rates.

“Those six-month and one-year rates will drop below 5%. And I’d expect to see that happen between now and June.

“Those longer-term fixed rates are largely priced in ... so you’re not really going to see those move at all.

“Rates at the bottom will sort of stabilise between 4.50% and 5%.”

Bolton said they were getting a lot of clients fixing for two and three years.

“The key message is 4.99% for two or three years fixed is actually a really attractive rate.”

The big banks were all now offering two-year fixed rates at 4.99%.

Bolton said the two-year fixed rate was typically the most competitive term for banks.

Reserve Bank policymakers sounded similar warnings last month around borrowers expecting substantive cuts to longer-term mortgage rates.

“We would expect to see the OCR continuing to have influence on those shorter-term rates,” Reserve Bank assistant governor Karen Silk said.

“I would say the expectation of the longer-term rates coming substantially lower is probably a lot less now.”

Kelvin Davidson, CoreLogic chief property economist, said mortgage rates looked to be settling into something of a new normal.

“We’re a lot closer to the trough than the peak. I think the biggest falls are probably behind us.

“There’s been a fixation lately on floating rates, short-term fixes, everyone trying to ride that wave down ... it’s getting closer to that point where people do start thinking about those longer term rates again.”

Nathan Miglani, managing director and senior adviser at NZ Mortgages, did not expect any movement in interest rates at all until the next OCR in April.

“We are expecting a drop [in the OCR] in April, then another drop in May. And I see the interest rates bottoming out this winter and that’s where we will see a trend of a lot of people will start fixing for longer terms,” he said.

Miglani said it had been almost three years since New Zealand last saw a 4.99% fixed interest rate.

He said for those coming off a fixed rate of about 6.89%, that was a drop of about $150 a week for an average Auckland mortgage.

Bolton said clients had to be careful about anchoring themselves to rates that came about during the Covid years.

“Those rates just aren’t a practical reality anymore. Anything below 5% is a good rate.

“Kiwis came off a period where they were getting rates below 2% and so even 4.99% relative to that feels expensive, but those were unusual times.

“In a normal rate cycle, we’re definitely at the bottom of the rate cycle, getting close to it. Rates really aren’t going to get materially better from here.”

Cameron Smith is an Auckland-based journalist with the Herald business team. He joined the Herald in 2015 and has covered business and sports. He reports on topics including retail, small business, the workplace and macroeconomics.