NZ home loan market sees dramatic shift as borrowers lock in rates
The 4.99% mortgage rate is driving a major shift in New Zealand’s home loan market, with borrowers locking in two-year terms.
New Zealand homeowners are changing their mortgage strategy in recent months, transitioning from short-term fixes to two-year terms as banks roll out competitive 4.99% interest rates.
According to the Reserve Bank, January data shows that 89.5% of new owner-occupier loans were either floating or fixed for less than a year.
However, Squirrel chief executive David Cunningham describes this as "a point in time thing" that has since undergone a profound transformation.
"The 4.99% rate has been an absolute game-changer," Cunningham said. "Everyone has gone from short terms to the traditional two-year which New Zealanders have loved for decades."
This strategic shift occurred as borrowers initially positioned themselves for anticipated OCR cuts. Many deliberately maintained floating rates or chose six-month fixes through November and December to capitalise on expected rate reductions. Now that these cuts have materialised, borrowers are locking in longer terms.
The interest rate differential is driving this behaviour, with major banks advertising six-month rates at 5.79% or 5.89%, making the two-year option at 4.99% significantly more attractive.
Cunningham noted that "60% or 70% of actual dollars is going into two years," with most borrowers splitting their loans between combinations of one-year, two-year, or three-year terms.
ASB senior economist Chris Tennent-Brown explained that 4.99% represents a psychological threshold where "borrowers got off their perch" and made commitments. He cautions that longer-term rates could potentially increase, noting market volatility still presents risks.
Tennent-Brown emphasised that borrowers should focus on minimising interest costs over the life of their mortgage rather than trying to time the market perfectly. "There's no point getting the lowest rate that occurs this cycle if you're paying through the nose to get it."
With the Reserve Bank suggesting a neutral cash rate of 3%, Cunningham believes 4.75% might represent the floor for mortgage rates in this cycle, absent another recession.
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