How low will one and two-year rates go?

Mortgage rates are set to fall, but may not drop as much as predicted a few months ago.

In August, economists at ASB predicted mortgage rates would drop 1% from current levels, in anticipation of a negative official cash rate and funding for lending programme.

Yet observers now say a negative OCR is less likely, due to better than expected signs in the economy. 

Wholesale markets have also lifted in the past week, betting against aggressive official cash rate cuts. 

Mike Jones, senior economist at ASB, told TMM Online: "Retail interest rates will fall further but perhaps not as far as previously thought, given we don't think the OCR will go to negative territory."

"Downward pressure on mortgage rates remains in place, given the introduction of the FLP. We think the 2% area [on one and two year rates] is where we'll end up."

Jones cautioned the cheap funding programme may not flow through to home loan rates for months to come.

"In Australia, you had to wait 3-6 months to get a feel of the take-up. It takes some time for banks to refinance their facilities. The effects won't be immediate."

Kiwibank has also outlined its predictions for mortgage rates over the next 12 months.

According to its latest report, the bank expects one year rates to fall between 2% and 2.5%, with two-year rates just under 2.5%.