On August 14, the Reserve Bank of New Zealand (RBNZ) cut the Official Cash Rate (OCR) by 0.25 percent to 5.5 percent. It was the first time the OCR had been cut since March 2020
With the RBNZ acknowledging that inflation now seems to be largely under control, the market and most economists are pricing in a 0.25 percent cut at each subsequent announcement through to the end of 2025, which would see the OCR dropping to around 4 percent at this time. However, if the inflation figures released in October are as low as we expect, we forecast an outside chance of a 0.5 percent cut to the OCR in November.
With the RBNZ reviewing the OCR approximately six-weekly, the above forecast implies that the one-year fixed mortgage interest rates are likely to fall to around 5 percent by the end of 2025.
For those looking for more immediate relief, we have already seen a slight fall in rates following with August 14, announcement with a marginal drop to the average six-month rate to 6.85 percent. However, we feel that the banks aren’t passing on some of the margins that they have gained in this space and that there is more room for the banks to drop this rate further, given the volume of people currently fixing for six-months (which is what we are currently recommending). We are therefore hopeful this rate will drop further over the coming weeks.
While we are currently recommending that most clients consider fixing for six months, we also believe that the 12-month rate is now also worth considering as most banks are now offering an interest rate around 6.45 percent (or 6.35 percent in the case of one bank).
With the 12-month rate currently being 0.5 percent lower than the six-month rate, the six-month rate would need to be a minimum of 1 percent lower at its expiry (eg. in January / February) for you to break even. This means that selecting a six or 12-month term right now is a 50:50 call – although for those looking for short-term cashflow relief, the 12-month rate may be a better option.
For clients looking for more certainty over the mid-term or who need more immediate cashflow relief, the 18-month rate (which has dropped to around 5.99 percent) may also hold some appeal. But given the likely trajectory of steady interest rate cuts through to the end of 2025, we favour the six and 12 month rates. Likewise, we do not recommend that clients fix for a two, three, four or five year term right now as while rates are slightly cheaper (between 5.59 and 5.99 percent), the rates do not make sense and are likely to cost mortgage holders more over the course of the loan term given the likely interest rate path.
Given the likely significant drop in rates over the coming weeks and months, we are advising that clients hold off on refixing their rates until one-to-two weeks out from when their rates will expire so that they can take advantage of the likely lowest possible rates. For most clients we are advocating that they then fix all their lending for six-months, or alternatively that they split their loan with around 50 percent fixed for six-months, and the remainder for 12-months to spread the risk.
However, to understand what the right decision for you is, we recommend speaking to a qualified financial adviser prior taking any action. Ultimately, it is up to you need to make your own decision, as no one can predict exactly what will happen with rates (especially in the longer term), but our advisers can assess your circumstances and provide advice based on the best course of action.
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The content of this article should not be taken as financial advice, or a recommendation of any financial product. These insights are based on current economic commentary, market pricing for interest rates, and our personal opinion. Threefold is not liable or responsible for any information, omissions, or errors present.
21 August 2024