However, he is also warning borrowers to budget for a long-term rate increase
Mortgage rates could fall further over the next twelve months according to forecasts released by ASB senior economist Chris Tennent-Brown, who says the cheapest option will likely be to fix and the roll shorter-term mortgage rates.
Borrowers can currently lock in interest rates as low as 2.55%, and Tennent-Brown says they’re likely to stay “extremely low” over the next few years. However, he says borrowers still need to be planning for potentially higher interest rate costs further down the line, and should not budget on rates staying low indefinitely.
Read more: Kiwibank claims negative OCR is unnecessary
He noted that rates were originally predicted to slowly come back up, as the Reserve Bank was expected to keep the OCR on hold at 1% throughout 2020 - a view which “changed dramatically” due to COVID-19. He says that now, the Reserve Bank will likely do “even more” to lower the cost of borrowing in New Zealand, potentially even going into a negative OCR.
“In August, the RBNZ stated that further easing could come from a negative OCR from early next year (the RBNZ is in “active preparation”) that would be linked to a Funding for Lending Programme for banks,” Tennent-Brown explained.
“When it comes to mortgages, our core scenario is that borrowing costs rates can fall over the year ahead if the RBNZ cuts the OCR to -0.5% and establishes a funding program that allows banks to access long-term funding from the RBNZ, at or near the OCR setting.”
“In short, we expect mortgage rates to decline over the year ahead,” he continued.
“Our forecasts suggest that some fixed term mortgage interest rates could dip below 2% over the year ahead, and all fixed terms should stay below current levels for the next two or three years.”
Read more: ANZ winds up investment scheme due to low interest rates
Tennent-Brown says that floating interest rates also look likely to decline, but will still remain “significantly higher” than fixed-term rates for most tenors. Despite this, he noted that rates could still go up unexpectedly if the economy recovers much quicker than is currently expected.
“For the next few years, borrowers should be able to access mortgages at very low interest rates,” he said.
“Although it seems like a long way off, we still expect the OCR to increase eventually. We expect the associated higher wholesale and term deposit interest rates to eventually start to push NZ mortgage interest rates higher in two-or three-years’ time.”
