Home Loan Rates in New Zealand May Fall Below 4% Soon

Home loan interest rates in New Zealand are trending downward as the Reserve Bank of New Zealand reduces the official cash rate (OCR). This shift, coupled with softening wholesale markets, has prompted speculation about the potential for rates to drop below 4 percent in the near future. Nearly half of all home loans in the country are either floating or set for refix within six months, making this a pressing question for many borrowers.

According to David Cunningham, CEO of Squirrel, it is indeed possible for rates to dip below this threshold. He projects that if the OCR falls to 2.25 percent as anticipated, one-year fixed mortgage rates could fall under 4 percent by early 2026. “The key driver will be lower term deposit rates and cheaper bank funding,” Cunningham explained. His company’s AI rate-prediction model supports the idea that sub-4 percent rates are on the horizon, suggesting that at least one lender might adopt “charm pricing,” such as 3.99%, to attract customers.

Despite these optimistic predictions, not all experts share the same view. Gareth Kiernan, chief forecaster at Infometrics, believes that a rate below 4 percent is unlikely unless the OCR approaches 2 percent. He noted that in 2019, rates only fell below 4 percent when the OCR remained at 1.75 percent for an extended period. “With current long-term rates anchored higher, it’s a stretch for now,” Kiernan stated.

While many borrowers are eagerly hoping for sub-4 percent mortgage rates, economists are taking a more cautious stance. They suggest that the window for ultra-low rates may still be several months away. Kiernan pointed out that another reduction of 25 basis points in the OCR may not be sufficient to lower wholesale rates enough for banks to offer rates under 4 percent. He remarked, “Particularly when longer-term rates seem to be more well-anchored at higher levels, I think you’d need an OCR of 2 percent before sub-4 percent becomes a possibility, at least from the big five banks. Smaller lenders may experiment with more competitive rates to attract attention.”

Looking ahead, Kiernan predicts that home loan rates may begin to increase again around October 2024. Borrowers and lenders alike are keenly observing these developments as they navigate a changing economic landscape.