New Zealand Strategy has already have proved costly with no real upside
Homeowners hoping to save money by staying on floating rates while waiting for the bottom of the interest rate cycle could be making an expensive mistake, according to ASB senior economist Chris Tennent-Brown.
With the Reserve Bank having cut the Official Cash Rate by 300 basis points to 2.5% since August 2024, and banks now offering one-year fixed rates at 4.49%, Tennent-Brown said the strategy of floating and waiting can cost many borrowers a lot in unnecessary interest.
"A lot of people have been doing that this year, and it's a pretty expensive place to be when you can already fix for low rates," he told NZ Adviser.
“People that were having these thoughts back in April - if they'd fixed or staggered for six, 12 or 24 months, they'd be rolling off one of those terms now and would have paid a lot less for a six-month fix than if they'd been floating."
ASB's latest home loan rate report shows floating rates currently sit at 5.99%, significantly higher than all fixed terms. The one-year rate has fallen 3 percentage points from its 2022-23 peak of 7.45%, while the two-year rate sits at 4.65%.
ASB expects the RBNZ will ease the OCR once more at its final 2025 review in November, to a low of 2.25% - lower than the bank forecast earlier in the year. However, Tennent-Brown cautioned that waiting for that meeting to act could be a costly gamble.
"I've always thought that the right time to fix and make a strategy is now," Tennent-Brown said. "If you've got something that matures over the next six weeks, you might want to hang out - but I wouldn't specifically focus on the Reserve Bank day."
He noted that banks often adjust rates before RBNZ meetings as markets price in expected moves. "You might find that the fixed rates are adjusted before the RBNZ meeting. Having those conversations now is the thing to do, rather than just waiting and seeing."
The timing concern will become more acute after November. With the first RBNZ meeting of 2026 not until February - some four months away - floating through that period to chase potentially lower rates would be an expensive strategy.
Laddered approach offers flexibility
For mortgage advisers working with clients, Tennent-Brown recommends a laddered strategy that balances flexibility with cost management while avoiding concentrated interest rate risk.
"People should look at their own individual cash flows and think about what's right in terms of timing," he said. "If you want to pay off a lump sum, make sure you've got the flexibility to do that. Likewise, make sure you've got the right mortgage structure to line up with what you're trying to achieve."
He said proportions will vary from borrower to borrower, but the key is having flexibility to manage cash flows and having something maturing every year. That means borrowers can avoid having a concentrated interest rate risk every 2-3 years.
“To be able to address that reasonably regularly I think makes a lot of sense,” Tennent-Brown said.
ASB's analysis suggests short-term rates could potentially ease slightly lower over 2025, with a bias toward flat or lower for one and two-year terms. However, the bank expects fixed terms beyond two years could stay near current levels or potentially increase, particularly given upward pressure on longer-term inflation expectations.
Strategic considerations
The bank's home loan rate report notes that choosing the right strategy involves trade-offs between cost, certainty, and flexibility - not simply trying to time the bottom of the cycle.
"It's not all about trying to time things to fix at the lowest fixed rate," Tennent-Brown said. "Borrowers need to balance their needs for flexibility, repayment timeframes, the cost of floating versus fixing, and other personal needs whilst trying to minimise the cost of borrowing over the entire period of a loan."
ASB also notes that despite current low rates, its economics team expects mortgage interest rates will ultimately settle near current levels in a much higher range than the historic lows struck during COVID-19.
For advisers, this means clients with maturing terms should be encouraged to develop and implement a structured strategy now, rather than gambling on further rate drops that may never materialise - or may be outweighed by the cost of waiting.
