ASB forecasts new mortgage rate trends for 2025
ASB’s latest Home Loan Rate Report reviewed the impact of RBNZ rate cuts on mortgage strategies, predicting further adjustments in 2025.
Overview of RBNZ’s impact on mortgage rates
Recent RBNZ actions
Between May 2023 and August 2024, the Reserve Bank of New Zealand (RBNZ) maintained the OCR at 5.5%, the highest level since 2008.
Due to a slowing economy and decreasing inflation, the RBNZ initiated rate cuts, reducing the OCR in August 2024 by 0.25% and making further cuts in October and November by 0.5% each time. By the end of 2024, the OCR was significantly reduced to 4.25%, with forecasts indicating an additional drop of 0.5% by February.
Chris Tennent-Brown (pictured right), senior economist at ASB, anticipates further reductions through 2025, though he believes “we are over halfway through its easing cycle.”
Borrowing and mortgage strategy considerations
Borrowers are currently evaluating their best strategies amidst a volatile interest rate market.
Tennent-Brown advised that “interest rate markets are volatile and can change quickly,” which directly affects mortgage interest rates. He warned that the path to lower mortgage rates isn’t straightforward and involves considerable risks.
Adjustments in mortgage rates
Following RBNZ’s rate cuts, there have been numerous adjustments across various mortgage maturities, particularly those between one and two years which have seen multiple changes.
Tennent-Brown noted that fixed rates are “now up to 2% below the peaks seen in 2022/23.” This suggests that financial markets are not only reacting to current conditions but are also pricing in expected future changes.
Drivers of mortgage interest rates
The OCR, offshore interest rates, and bank funding costs, including wholesale rates and term deposit rates, are critical in determining mortgage rates. Tennent-Brown said that different mortgage terms are affected differently by these factors.
For instance, shorter-term mortgage rates have been influenced by a softening labour market and weaker demand which are anticipated to lead to further OCR cuts in 2025.
Strategic choices for borrowers
Deciding on the right mortgage term
Choosing the optimal mortgage strategy is complex. Current high floating and short-term rates, combined with the prospect of further RBNZ policy easing in 2025 and upward pressure on long-term rates, make decision-making challenging.
“Choosing the ‘right’ strategy is never straightforward,” Tennent-Brown said, highlighting the need for borrowers to balance cost, rate certainty, and flexibility.
Long-term vs. short-term rates
There is a slight easing bias for short-term mortgage rates in the first half of 2025, while long-term rates are likely to remain stable or possibly increase. This scenario presents borrowers with the classic dilemma of opting for immediate certainty or gambling on future rate reductions, ASB reported.
For the full insights and detailed analysis on future mortgage rate trends, refer to the ASB Home Loan Rate Report.
