Mortgage rate drop will be minor: ASB

Amid growing speculation the central bank will slash the OCR to 0.75% or even 0.50% this month due to the coronavirus outbreak, ASB economists suggest mortgage rate decreases will be small. 

A new report conducted by the ASB team, including chief economist Nick Tuffley, concludes rate cuts will be small compared with those seen in the 2018/2019 period. 

"Fixed-term mortgage interest rates could dip further too if the RBNZ cuts the OCR, and wholesale interest rates fall further," the bank's latest report claims. "In saying this, we stress that large falls in carded mortgage rates have already occurred over the past couple of years. We think that any declines will be minor (circa 0.25%-0.5%) compared with the declines recorded in 2018/19."

The bank expects the RBNZ to slash the OCR by 25 basis points this month, and a further 25 basis points in May. 

ASB believes fixing and then rolling shorter mortgages terms is likely to be the cheapest option over a five-year time horizon, if OCR cuts do arrive. 

"Our forecasts suggest mortgage interest rates could get slightly lower over the coming months, but there is a cost in not fixing now which is broadly the difference between floating rates and the fixed term rates currently on offer (over 1% per annum for some terms).

"Borrowers should focus on minimising borrowing costs over the life of their mortgage, rather than attempting to pick the bottom, potentially paying more costs now (by floating) than future savings (by eventually fixing)."