Borrowers Urged to Consider Fixing Home Loans Amid Rate Uncertainty

Interest rates are a focal point for borrowers this year, with forecasts suggesting a potential rise in the near future. As rates have generally trended downward since early 2024, experts recommend that homeowners consider fixing their loans soon. According to the Reserve Bank, the average two-year special rate has fallen from approximately 7 percent at its peak to just over 4.5 percent by the end of last year. Major banks are currently advertising two-year rates around 4.69 percent to 4.75 percent.

In a recent cash rate update, the Reserve Bank indicated it does not foresee further rate cuts, which has led to wholesale markets adjusting upward and some fixed rates increasing. Reserve Bank Governor Anna Breman mentioned that the market may have adjusted too aggressively. Mike Jones, chief economist at BNZ, noted that while interest rates are likely to remain stable for now, there is a growing possibility that hikes could happen sooner than previously anticipated. “The first lift in the Official Cash Rate (OCR) is still expected in February 2027,” he stated. “However, data suggests it could arrive by late 2026, which the markets are beginning to price in.”

Jones elaborated that wholesale markets now expect a 25-basis-point increase by the end of the year, implying that retail rates may not fluctuate significantly, even if this expectation holds true. He expressed caution about the future of mortgage rates, suggesting they may stabilize but with little room for significant jumps.

ASB economists concurred, stating that both the OCR and mortgage rates have remained lower than anticipated in their forecasts from early last year. They project that short-term rates will maintain their current levels throughout 2024 before experiencing increases as economic conditions improve. Longer-term fixed rates beyond two years could face upward pressure through 2026.

The influence of global central banks has also been significant, with many cutting policy rates in 2025 at varying paces. “This has affected global interest rate markets, including those where New Zealand banks compete for funding,” ASB economists noted. They further emphasized that longer-term New Zealand mortgage rates have eased due to a combination of global and local forecasts, but are now under upward pressure from inflation expectations and actions taken by global central banks.

In terms of inflation, Gareth Kiernan, chief forecaster at Infometrics, anticipates the OCR to hold at 2.25 percent until November. He cautioned that inflation rates may exceed the Reserve Bank’s expectations. “There are questions about how quickly the headline inflation rate might moderate, which raises the possibility of an earlier rate increase,” he explained.

Kiernan suggested that borrowers should consider fixing their home loan rates for longer periods, as evidence indicates that retail rates are unlikely to decline further. “Previously, I mentioned that borrowers might have until mid-2024 before facing upward pressure, but the market’s dynamics have shifted more quickly,” he added.

Home loan options are also evolving, with three-year special rates having hit a low of around 4.8 percent in November, only to rise thereafter. Major banks are now advertising rates exceeding 5 percent. David Cunningham from Squirrel indicated that competition among banks is fierce, with institutions focusing on incentives like cash back rather than lowering rates.

In addition to interest rates, BNZ has revised its expectations for house price increases this year. Initially forecasting a modest rise of 4 percent, they have adjusted that figure down to 2 percent. Jones remarked that the housing market appears balanced, with demand and supply levels aligning effectively.

This market equilibrium has persisted for much of the past year, characterized by increased demand matched by a corresponding rise in new listings. “We believe this balanced state will continue for an extended period,” he concluded.

As borrowers navigate the evolving landscape of interest rates and home loans, careful consideration and timing will be crucial in making informed decisions about fixing loans amid uncertain economic conditions.