Expectation of Nov rate cuts prompts record short rate borrowing

Most banks now predict the Reserve Bank will start cutting the OCR from November as the economy continues to stall, unemployment rises and inflation falls back within the 1-3% band. 

The latest RBNZ fixed rate term duration figures show the share of mortgages on six-month fixed terms borrowed by owner-occupiers rose to a new historical high of 17.1%, which equates to about one in six mortgages.

Compared to last year, when mortgages on six-month terms was at just 3.4%, this increase gives a sharp indication of borrowers’ thoughts on where they believe interest rate increases are going – down in the not too distant future.

The RBNZ is not predicting a drop until mid-next year, but the finance markets have a November cut already fully priced in, with a 50-50 chance of a cut in October.  

Investor borrowing on six-month terms rose from 18.7% in April to 21.7% in May - about one in five mortgages. 

While those figures hit historical highs, the one-year fixed term is the most popular for all borrowers. This term accounted for 36.5% of all new owner-occupier lending, but down from 39.4% in April.

It is the same story for investor borrowing, with one-year terms making up 40.2% of new lending, however that was down from 45% in April.

Overall total mortgage lending was $7.1 billion, up 18.5% from $6b in April and compared to the same month last year, up 22.8% from $5.8b.

The share of total new residential lending on fixed interest rate terms rose to 82.3%, up from 81.9% in April.

Owner-occupier lending increased to $5.2b in May, while investor mortgage lending rose to $1.8b.

On terms above 18-months, owner occupier lending was steady. For example, the share of two-year fixed mortgages rose to 8.8% from 8.6% in April, and the share of three-year fixed terms increased to 3.1% from 2.8%, while four-year fixed terms held steady and are at a historical low at 0.3%.

Owner occupier loans on floating terms are dropping, from 17.7% in April to 17.1% in May.

Investors’ share of 18-month terms increased from 8.9% in April to 11.9% in May, whereas two-year fixed terms declined from 7.8% to 5.9%.

Of the subcategories of commercial property lending, investment property dropped by $72 million (13.2%) to $473m.

Commercial property development rose by $86m (97.7%) to $174m, however, residential property development reported a 2% decline from $98m in April to $96m in May.