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OCR Cuts Driving Mortgage Rate Reductions
The Reserve Bank of New Zealand (RBNZ) has signaled further cuts to the OCR in 2025, following recent reductions aimed at stabilizing the economy. Economists predict a 50-basis-point reduction in February, with more to follow later in the year.
The OCR influences wholesale interest rates, which banks use to price home loans. David Cunningham, chief executive of Squirrel, said that wholesale rates have already dropped significantly, creating room for immediate reductions in mortgage rates.
“Wholesale rates have fallen since the last OCR cut, with the two-year swap rate now down by 20 basis points since the latest GDP release,” Cunningham explained.
This trend reflects the broader economic landscape, as New Zealand grapples with the aftermath of a technical recession. “There’s at least 20 basis points of reductions ready to flow into mortgage rates almost immediately,” Cunningham added.
Why Mortgage Rates Are Set to Fall
There are several key factors behind the anticipated drop in mortgage rates:
- Wholesale Market Trends:
The two-year swap rate has fallen from a high of 5.79% in October 2023 to just over 3.4%, while the one-year rate has dipped from 5.69% to approximately 3.5% over the same period. These reductions indicate that markets have already priced in the OCR cuts forecast for 2025. - Bank Term Deposit Rates:
Banks are still paying around 5% for six-month term deposits, compared to a six-month wholesale rate of 3.8%. Cunningham believes this gap will narrow as term deposit rates decline to about 4.5%, providing further room for banks to lower home loan rates. - Competition Among Lenders:
The lowest current advertised rate from the big five banks is 5.49% for a three-year fixed term, offered by both ASB and Westpac. However, lenders are likely to cut rates to remain competitive as wholesale funding costs decrease.
Cunningham predicted, “Sub-5 percent [rates] are on the horizon, with a potential fall of about 0.5 percent in the next month or so, even without further OCR cuts.”
Homeowners Already Benefiting
Economist Shamubeel Eaqub noted that while recent decreases in home loan rates have been modest, they have closely tracked wholesale rate movements.
BNZ Chief Economist Mike Jones highlighted that some borrowers are already benefiting significantly. “Home loan rates have fallen further than the OCR so far, reflecting expectations of future cuts,” Jones explained.
Jones provided an example of the savings homeowners are seeing: Someone purchasing a median-priced house with a 20% deposit is now paying $9000 less annually in interest compared to the start of 2023.
Additionally, more than half of all mortgage borrowers in New Zealand will have their loans reset during the first half of 2025, positioning them to benefit from lower rates.
What Falling Rates Mean for Homebuyers and Homeowners
Lower mortgage rates are good news for both existing homeowners and those looking to enter the property market. Reduced rates mean lower monthly repayments, increased affordability, and potentially more borrowing capacity for new buyers.
For example:
- A $500,000 loan at 6% interest over 25 years requires monthly repayments of about $3,200. At 5%, those repayments drop to approximately $2,900, saving borrowers $300 per month.
- Over the life of the loan, this could equate to tens of thousands of dollars saved in interest.
With rates expected to drop further, potential buyers may find 2025 an opportune time to secure a home loan.
The Wider Economic Impact
While lower mortgage rates are a boon for homeowners, they reflect a cooling economy. New Zealand’s GDP data showed the country entered a technical recession, prompting the RBNZ to take action to stimulate growth.
The housing market, which had experienced significant price corrections in recent years, could see renewed activity as borrowing becomes more affordable. However, experts caution against overextending, particularly in a volatile economic environment.
Final Thoughts
The prospect of sub-5 percent home loan rates is a welcome relief for New Zealand homeowners. With falling wholesale rates, OCR cuts, and increased competition among banks, the likelihood of reduced mortgage costs is high.
For those looking to buy or refinance, now is the time to assess your options. Talk to a mortgage adviser to ensure you’re well-positioned to take advantage of these favorable conditions.
Stay informed about changes in the housing market, and act decisively to secure the best rates. With expert predictions pointing toward significant savings, 2025 could be a transformative year for New Zealand’s home loan borrowers.
SOURCE: RNZ