Mortgage strategies must balance flexibility and cost as rate cuts near their end, ASB warns
Mortgage rates across New Zealand are easing as the Reserve Bank continues to cut the official cash rate, but ASB’s latest Home Loan Rate Report warned borrowers to stay cautious.
With global uncertainty and inflationary pressures still in play, mortgage strategies must now balance flexibility, certainty, and long-term affordability, said ASB chief economist Nick Tuffley (pictured).
The ASB report followed an RBNZ survey showing mortgage demand rose for the first time since 2021, though economic and employment challenges persist.
Borrowers weigh their options as rate cycle nears its end
After a year of easing, RBNZ’s OCR has fallen by 200 basis points, from 5.5% in August 2024 to 3.5%.
“Our view is the RBNZ will continue to reduce the OCR over 2025 but is nearing the end of the easing cycle,” Tuffley said.
However, he warned borrowers that the path for mortgage rates won’t be a straightforward one.
“Interest rate markets are volatile and can change quickly,” Tuffley said. “Volatility in interest rates can flow through into mortgage interest rates. Being aware of these risks is an important part of choosing a mortgage strategy.”
Beyond RBNZ: What drives mortgage rates now
Tuffley emphasised that while OCR announcements remain important, mortgage rate movements often occur between RBNZ decisions due to broader financial market activity.
“Fixed-term mortgages have been moving across many maturities in between each RBNZ decision,” he said.
Competition between banks has also intensified, putting further downward pressure on fixed mortgage rates over 2025.
Tuffley reminded borrowers that trying to perfectly time the lowest point in mortgage rates is not the only strategy to consider.
“Borrowers need to balance their needs for flexibility, repayment timeframes, the cost of floating vs. fixing, and other personal needs whilst trying to minimise the cost of borrowing over the entire period of a loan,” he said.
Short-term rates: Slight easing expected
Floating and short-term fixed mortgage rates, especially up to one year, have already fallen, reflecting anticipated OCR cuts.
“We expect the RBNZ to reduce the OCR slightly more over 2025,” Tuffley said. “This view is also reflected in the financial markets where mortgages are funded.”
He noted a bias for short-term mortgage rates to ease slightly lower through the first half of 2025.
Long-term rates: Global pressures complicate the picture
While long-term rates have also fallen, significant further declines appear unlikely.
“Our view now is that significant falls for the longest fixed rates are unlikely, especially with some of the recent global developments (such as tariffs) pushing inflation expectations higher,” Tuffley said.
He added that fixed terms beyond two years could stay near current levels or potentially increase, even as shorter-term rates ease.
Building a mortgage strategy: Trade-offs and flexibility
Choosing the right mortgage strategy remains complex, Tuffley said, given the current mix of conditions:
- Relatively high floating and short-term fixed rates
- Expectations of more RBNZ easing
- Longer-term rates facing mixed global and local pressures
Tuffley explained the classic trade-off borrowers must consider: paying a higher rate for flexibility (floating) or locking in some certainty at current fixed rates.
“Ultimately, it is a trade-off between the cost of the mortgage rate, interest rate certainty for a longer period, versus the flexibility of the shorter terms and the potential for rates to ease over the years ahead,” he said.
The ASB economist also stressed that rates could move in unexpected ways depending on future inflation outcomes and economic shocks.
Borrowers: Final tips
Tuffley advised borrowers to focus on choosing a mortgage structure aligned to their personal financial situation.
“We suggest borrowers pick a strategy that suits personal budgets (including a tolerance for changing interest rates), the need for flexibility, as well as the goal of minimising interest rate costs,” he said.
Key factors borrowers should also consider include:
- Break costs when exiting a fixed rate early
- Loan-to-value ratios (LVRs) affecting borrowing capacity
- Debt-to-income (DTI) restrictions, now active and monitored by RBNZ
Tuffley concluded that mortgage interest rates are likely to settle “in a higher range than the historic lows struck during COVID-19” — meaning today’s borrowers must plan carefully for a more challenging environment ahead.
