Are mortgage rate cuts working? Here's what the data says

The tide may be turning for mortgage holders, but the economic pickup is slow, according to interest.co.nz’s David Hargreaves. 

The Reserve Bank (RBNZ) has steadily cut the official cash rate (OCR) from its 2023 peak of 5.5% to 3.5%, but confidence among households and businesses has yet to fully rebound 

“That’s arguably why we aren’t really seeing too much of a visible pickup in the economy yet,” Hargreaves wrote. “People appear to be pretty cautious and reluctant to get out spending again. Confidence may take time to return.” 

Some economists — particularly from banks — are calling for faster and deeper cuts to the OCR. But Hargreaves is not convinced that aggressive easing is the answer right now. 

“Would more aggressive upfront interest rate cuts help the overall economy now, when the cuts that have already been made are probably not yet taking full effect?” 

Mortgage rates are falling — slowly but steadily 

Fixed mortgage rates have already dropped considerably. One-year fixed mortgages became the most popular loan type again in March 2025, and the average weighted one-year rate for new mortgage commitments had fallen to 5.18%, down from 7.09% in January 2024.  

The most common advertised rate is now 4.99%. 

But for existing borrowers, the impact takes time. As Hargreaves noted, the peak yield across all outstanding mortgages — a measure of what banks earn from existing customers — was 6.39% in October 2024.  

By March, this had declined to 6%, with fixed-rate yields showing notable momentum, dropping from 6.24% in January to 6.06% in March. 

“So again, things took time to get rolling. But they are rolling now,” he said. 

Floating-rate yields have fallen faster, from a peak of 6.99% in August to 5.63% in March 2025. 

Lower repayments, but just beginning to flow through 

The mortgage interest charged by banks peaked in Q4 2024 at $5.804 billion, compared to $2.32 billion during the low-interest period in Q3 2021. But as of the March 2025 quarter, that figure has eased to $5.571 billion, showing the first meaningful decline. 

Scheduled repayments (including principal) fell slightly to $7.527 billion, a $139 million quarter-on-quarter reduction. 

“So, it's starting to come down — but it's only just started to come down,” Hargreaves said. 

A wave of resets will accelerate the impact 

As of March, New Zealand’s total outstanding mortgage balance was $374 billion. About $150 billion (40%) of that is due to reset by September — equating to roughly $25 billion a month. An additional $48.3 billion in floating loans could reset at any time. 

“Some people have already had a mortgage rate reduction and face lower payments. A heck of a lot more people are due for that to happen within the next few months,” Hargreaves said. 

Recovery in sight, but RBNZ must tread carefully 

Economic indicators show green shoots.  

Annual inflation is now 2.5%, comfortably within RBNZ’s 1–3% target. GDP rose 0.7% in the December 2024 quarter after consecutive contractions, and unemployment held steady at 5.1% in Q1 2025 — better than both RBNZ and economist forecasts. 

“The signs of recovery are there. Slow and gradual, yes. But there,” Hargreaves said. 

Export sectors, particularly dairy and meat, are performing strongly, which could bring broader benefits to regional economies. 

“Much of the statistical information that’s coming out about the economy so far this year has been better than economists, and indeed the RBNZ, have expected.” 

However, inflation expectations have lifted, with one- and two-year forecasts at 2.41% and 2.29% — the sharpest rise in over two years but still within target. 

May OCR decision could set the tone 

RBNZ’s next OCR review on May 28 is shaping up to be pivotal. Another cut — likely from 3.5% to 3.25% — appears all but certain. But what happens next is less clear. 

“Should [the RBNZ] really drop the OCR down a lot from here... when the signs are starting to show that the rate reductions already in place ARE starting to work?” Hargreaves said. 

House market activity is lifting. And while the RBNZ would want to avoid reigniting inflation or fuelling an overheated property market, banks are keen for further OCR cuts to maintain competitive lending and grow market share. 

“Without further large falls in the OCR, it's hard to imagine banks pushing rates much lower than they are, although my hunch is we will still see rates in the low 4s by the end of this year,” Hargreaves said. 

In short, the momentum is building — but the RBNZ will have to decide whether the recovery already underway needs more fuel, or just more time. 

Read the interest.co.nz analysis here.