Adviser says it's still uncertain where the OCR will settle, but there is room to edge lower
Wholesale interest rates have now dropped across all major banks as markets position for another Official Cash Rate (OCR) decrease.
ASB has become the last major bank to cut mortgage rates, reducing its six-month fixed rate by 17 basis points to 5.12%. The move follows similar cuts from ANZ, BNZ, Kiwibank and Westpac as all major banks position ahead of the Reserve Bank's widely expected 25 basis point OCR cut to 3% on Wednesday.
Squirrel’s John Bolton says that the current one-year rate of 4.79% is “a fantastic rate,” but there is still potential for rates to go a little lower.
“We’re not quite sure where the OCR will settle down,” Bolton noted in an update.
“Obviously in previous forecasts, the RBNZ has said that 3% is the bottom. We’ll be there with the next OCR cut. The market is anticipating that we could go a bit lower than that. My general view is that we’ll see one-term fixed mortgage rates sort of settling down around that 4.5% mark.”
50% of all mortgages are currently set to refinance over the next six months. For borrowers looking for the best strategy, Bolton suggests a split approach between short and long-term rates.
"If I was fixing my mortgage at the moment, I'm kind of a bit short-term, a bit long-term,” he said. “I’d probably split 50/50 - a short-term rate like the one-year rate right at 4.79%, and maybe part of it at three years at 4.95%.”
Good for borrowers, bad for savers
The rate cutting has been driven by wholesale markets pricing in two OCR cuts to 2.75%, according to Squirrel’s David Cunningham. However, while borrowers are benefiting from lower rates, term deposit rates have also fallen, meaning savers are on the losing side of the equation.
The housing market response has also been muted despite falling interest rates.
“Real estate activity is back around historical levels, but house prices are barely moving despite the interest rate falls. This reflects the pessimism of the household sector," Cunningham told NZ Adviser.
“The agri-strength and weight of lower mortgage rates flowing through as higher fixed rates roll off should improve sentiment over the next year, though very weak migration and, arguably, a surplus of housing stock as construction exceeds population growth, will constrain prices.”
More cuts to come?
At this stage, there’s little doubt that the Reserve Bank will be cutting the OCR to 3% on Wednesday. The direction of any future rate cuts, and whether we’ll reach 2.75% or below, is still up in the air.
Cunningham noted that for the next year, competitive pressures will predominantly impact mortgage rates, "unless the OCR goes lower than 2.75% (in which case fixed rates could fall further), or the RBNZ signals 3% is the bottom in the OCR (in which case fixed rates would rise).”
Despite a “meh” economic performance, Cunningham says that lending activity has largely remained solid. The market shift has created opportunities for first home buyers in particular, who are still benefiting from a "goldilocks market" with lots of choice, reduced competition, ample time to make decisions, and lower interest rates. Meanwhile, investors are actively seeking good deals, and cash back offers are driving refinancing activity.
The transformation has been quite substantial. "Isn't it interesting how we've gone from 'housing crisis' and things like KiwiBuild, to it not even being on New Zealanders' radar. All in the space of a couple of years," Cunningham observed.
