Mortgage borrowers better off by $9,000 on average

The BNZ estimates a prospective home owner wanting to buy a median house of about $780,000 with a 20% deposit is now looking at an annual interest bill about $9,000 lower than it was at the start of the year.

Mortgage interest rates have so far fallen further than the OCR.

BNZ chief economist Mike Jones in his latest Eco Pulse says in part, this reflects wholesale markets anticipating further OCR cuts next year.

Markets see a low in the cash rate of about 3.1% by late 2025, not far from the bank’s 2.75% expectation.

However, household and business appetite to take on additional borrowing has been understandably subdued given the poor economic backdrop and labour market, Jones says.

What about rates that are paid on existing borrowing?

He says these tend to move more slowly given the preponderance of fixed-rate borrowing in New Zealand.

“As we’ve been flagging, the average interest rate paid on existing mortgage borrowing is yet to fall. It even lifted marginally to 6.39% in October.”

Holding this rate up has been an increasing number of mortgage borrowers opting to roll onto floating rates, in anticipation of additional declines and lower interest payments ahead.

The good news, he says, is that, over the coming six months, a record 51% of all mortgage borrowings will experience a rate reset onto likely lower rates.

“By mid-2025, we estimate the average paid mortgage rate will have dropped to about 5.7%, with further declines likely over the second half of next year.”

Not much movement expected in longer term rates

Looking at longer term interest rates, ANZ economists are predicting slight rises in three- to five- year fixed terms over coming quarters, reflecting the sharp increases in wholesale interest rates over recent months in the fallout of the US presidential election.

The bank says two-year fixed rates sit somewhere in the middle, and it isn’t projecting much movement there.

It is forecasting another 0.75% of OCR cuts next year, taking the OCR to 3.5%.

Because those cuts are expected, ANZ chief economist Sharon Zollner says she does not see them having too much of an impact on two- to five-year swap rates, which all fell below 4% some time ago in anticipation of the OCR going lower.

“They may even go higher if global rates rise, and in fact, because we have upgraded our long-term wholesale rate forecasts (mostly because of global factors), we are now projecting while mortgage rates are likely to continue to fall over time as the RBNZ delivers further cuts, it is likely that a big chunk of the peak-to-trough move is already behind us and falls from here could be slower.”

Zollner says lower interest rates and easing credit conditions are strong tailwinds for the housing market and affordability is still a big issue.

The median house price to income ratio has dropped to about six after it got close to nine in 2021, but even at the lower level, affordability is stretched and likely to cap the extent of house proce prices, particularly in light of the RBNZ’s new debt-to-income (DTI) limit tool, Zollner says.

“The cost of servicing a home loan as a share of income is expected to settle higher than last decade, as rising house prices increase loan amounts at the same time as weak labour marketconditions restrict household income growth,” she says.

“Combining house prices to incomes with the cost of servicing a new mortgage into a single index (with equal weights) highlights that housing affordability is likely to remain stretched over the coming years, reducing the scope for persistent and large relative price gains compared to recent decades.

Borrowing rates next year

The ASB is expecting a further 0.100% of RBNZ OCR cuts, including a 0.50% cut in February, taking it to 3.25%.

At 3.25% this will leave the OCR well within the 2.75-3.75% “Goldilocks” or neutral OCR zone, Mark Smith, ASB senior economist says.

Smith says sticky domestic inflation means the OCR is unlikely to move below 3%, but a lot can happen in the next 12 months, and ASB can see instances requiring the RBNZ to switch from the policy brake to the accelerator.

“Conversely, a burst of inflation could see the RBNZ pare back monetary easing over 2025.”

He says equivalent mortgage interest borrowing rates are likely to be in the 5-6% range by the end of the year.

“The average interest rate at the end of 2025 should be 0.100% lower than its 6.4% third quarter peak of this year.

Smith says lower interest rates should provide a welcome boost to the housing market and ASB expects house prices to rise 5-10% next year, although it will take until 2026 to surpass 2021 record peaks.

There are still reasons for caution, he warns. The global outlook is still clouded in uncertainty. New Zealand is past peak net immigration, and the labour market lags the cycle and the climb in unemployment has some way to go.

“Pressures on corporate profitability will need to also quickly subside so that firms can pivot from cost-cutting mode to hiring and investing.

“Housing affordability has improved but housing is expensive, with housing rental yields still below the cost of funding.”