Interest rates are dropping, But for how long?
New Zealand’s OCR has seen multiple cuts since August 2024, bringing it down from 5.5% to 3.75% as of early 2025.
With inflation cooling and economic activity slowing, the Reserve Bank (RBNZ) is expected to continue easing rates further throughout the year, though the cycle may soon be nearing its end, according to the latest ASB Home Loan Rate Report.
While falling rates are good news for borrowers, the mortgage market remains volatile, and predicting the best strategy is challenging.
ASB chief economist Nick Tuffley (pictured) warned that borrowers should stay mindful of market shifts and avoid assuming rates will only move in one direction.
“Interest rate markets are volatile and can change quickly,” Tuffley said. “Volatility in interest rates can flow through into mortgage interest rates. Being aware of these risks is an important part of choosing a mortgage strategy.”
Short vs. long-term mortgage rates: What’s changing?
The direction of mortgage rates depends on both local and global economic factors, and different mortgage terms are reacting in different ways.
Short-term mortgage rates (floating or fixed for up to 1 year)
These rates have been easing due to weaker labour markets, slowing business activity, and prior OCR cuts.
In January, 31.8% of new mortgage commitments were floating rate, up from 23.5% in December, making it the most popular choice among owner-occupiers, surpassing six-month fixed rates, which fell from 38.1% to 30%, according to RBNZ data.
ASB expects RBNZ to cut rates by another 50 basis points in 2025, keeping short-term rates on a downward path, at least in the first half of the year.
Long-term mortgage rates (fixed beyond one year)
Global financial markets have also seen rate cuts, leading to lower wholesale funding costs for New Zealand banks.
However, major global central banks have started signaling an end to aggressive rate cuts, meaning long-term rates are less likely to fall significantly.
“Long-term rates are now under some upward pressure even though RBNZ is still in ‘easing’ mode,” Tuffley said.
This aligns with ANZ’s Property Focus report, which suggests now may be the best time to lock in longer fixed-term mortgages, as further rate drops seem unlikely.
What should borrowers consider?
With falling rates, borrowers must decide whether to lock in rates now or wait for further reductions. The “bird in the hand or two in the bush” dilemma is more relevant than ever.
- Floating or short-term fixed rates allow flexibility, but they are still relatively high.
- Longer-term fixed rates provide certainty but may not fall much further.
ASB’s economic team suggests borrowers choose a mortgage strategy based on personal financial stability and risk tolerance.
“It is a trade-off between the cost of the mortgage rate, interest rate certainty for a longer period, vs. the flexibility of the shorter terms and the potential for rates to ease over the years ahead,” Tuffley said.
Other key factors influencing mortgage rates
Aside from RBNZ rate cuts, several external factors influence mortgage pricing:
- Loan-to-value ratios (LVRs): RBNZ regulates lending based on the amount of deposit or equity a borrower holds.
- Debt-to-income (DTI) restrictions: RBNZ has introduced limits on borrowing relative to income, impacting credit availability.
- Bank competition: Interest rates fluctuate between lenders based on deposit funding and market competition.
The outlook for mortgage rates in 2025
While mortgage rates are significantly lower than their 2022/23 peaks, ASB economists cautioned that they will not return to the record lows seen during COVID-19.
Borrowers should be prepared for moderate rate declines rather than expecting a dramatic drop. Those considering refinancing or restructuring their mortgage should evaluate break costs, repayment flexibility, and their financial stability before making a decision.
For now, ASB advises borrowers to pick a strategy aligned with their budget and tolerance for interest rate fluctuations, rather than betting on where rates will go next.
