What's driving the drop in borrowing costs?
Home loan borrowers in New Zealand could soon enjoy rates below 5%, according to experts, as falling wholesale rates and potential cuts to the official cash rate (OCR) pave the way for reduced mortgage costs.
Currently, the lowest advertised mortgage rate among the major banks is 5.49% for a three-year term, offered by ASB and Westpac. However, mortgage broker David Cunningham, chief executive of Squirrel, anticipates significant reductions in the near future, a report from 1news.co.nz noted.
According to Cunningham, there are at least 20 basis points to come off home loan rates “almost immediately.” In an interview with 1news.co.nz, he suggested that rates could drop by up to 0.5% within the next month, even without changes to the OCR.
Factors driving rate cuts
The Reserve Bank is expected to cut the OCR by another 50 basis points in February, with further reductions predicted later this year. Wholesale rates have already responded to economic signals, including a recent GDP release confirming New Zealand’s continued recession.
Two-year swap rates have decreased significantly, from a peak of 5.79% in October 2023 to just over 3.4%. Similarly, one-year rates have dropped from 5.69% in February last year to about 3.5%.
“That’s because banks are still paying 5% for six-month term deposits versus a wholesale rate for six months of 3.8%,” he said. “I think those term deposits will drift down to 4.5%, enabling home loan rate cuts. Sub-5% is on the horizon.”
Gradual adjustments expected
Economist Shamubeel Eaqub highlighted that mortgage rates typically align with swap and wholesale rates.
“Although I would note the decrease in recent weeks have been on a small scale,” Eaqub said.
Late last year, BNZ chief economist Mike Jones observed that home loan rates had already fallen sharply than the OCR due to forward-looking wholesale market activity. Jones estimated that a borrower purchasing a median-priced home with a 20% deposit would save approximately NZ$9,000 annually in interest compared to rates at the start of 2023.
Additionally, about 51% of all mortgage borrowers are expected to refinance their loans during the first half of this year.
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