Sub-4% mortgage rates likely by early 2026

A one-year fixed home loan rate below 4% could be on the horizon, according to Squirrel chief executive David Cunningham (pictured), if the Reserve Bank of New Zealand cuts the official cash rate (OCR) by another 25 basis points in November.

“If the OCR eases to 2.25% in late November, it’s likely we’ll see the one-year fixed mortgage interest rate fall to (just) below 4% in early 2026,” Cunningham wrote for interest.co.nz.

He added that the projection is based on Squirrel’s modelling of Reserve Bank-sourced retail and wholesale interest rates over the past eight years, with the key catalyst for further rate reductions being lower term deposit rates feeding through to reduced bank funding costs.

In an RNZ report, Cunningham noted that nearly half of New Zealand’s home loans are either floating or due to refix within the next six months, meaning many borrowers stand to benefit quickly if mortgage rates continue to fall.

Banks’ next move could push fixed rates below 4%

Squirrel’s model forecasts the one-year fixed home loan rate to fall to around 4.1% in early 2026 – but Cunningham expects one of the major banks to break the 4% barrier.

“Our experience indicates that, sooner or later, a bank won’t be able to resist offering a headline rate of 3.99%,” he said.

Cunningham explained that while New Zealand’s banking sector is largely driven by profit motives and overseas shareholders, this also makes rate behaviour relatively predictable.

“At the end of the day, they’ve got to protect their underlying margins,” he said. “As a rule, they also always tend to move together (which is typical of an oligopoly).”

However, not everyone agrees a sub-4% mortgage rate is realistic.

Infometrics chief forecaster Gareth Kiernan said another 25-basis-point OCR cut might not be enough to push wholesale rates down sufficiently.

“I think you’d need to get an OCR of 2% before sub-4% becomes a possibility, at least from the big five banks,” Kiernan said. “Sometimes the smaller lenders can go a bit more off-piste with their rates to try and attract attention.”

Modelling shows flow-through from OCR cuts to retail rates

Squirrel’s AI-driven model uses historical wholesale rate data from the Reserve Bank to simulate how future OCR reductions might influence mortgage rates.

“Looking ahead –and assuming economists (and the wider market) are right in thinking the OCR will drop to 2.25% in late November – the model shows that we’re likely headed for a sub-4% one-year fixed mortgage rate sometime early next year,” Cunningham said.

The modelling takes into account the cost of bank deposits – including transaction accounts, savings, and term deposits – as well as the one-year swap rate, which reflects market expectations for the OCR over the next 12 months.

Why 3.99% matters for banks and borrowers

Cunningham said the first bank to offer a rate below 4% could trigger a market-wide shift.

“Like many retailers, banks love a price that ends in ‘.99’. It’s a psychological tactic called ‘charm pricing’,” he said. “We reckon that if the one-year mortgage rate drops close to 4%, sooner or later one of the banks will want to claim bragging rights to a rate below 4%. And then, before you can say ‘oligopoly’, every other bank will follow.”

Sub-4% mortgage rates could boost housing and economic stability

According to Cunningham, a one-year fixed rate near 4% wouldn’t reignite inflation but would instead support a steady economic recovery after two years of weak growth.

“The New Zealand economy has been pretty stuffed for the last two years,” he said. “From a global perspective, it’s lonely having a shrinking economy. Most western countries have managed to remain in positive economic growth territory even as they’ve fought (and won) the battle against inflation.”

He said that Squirrel has long argued the Reserve Bank “seriously overdid things in hiking interest rates” and said the next phase should be about restoring balance.

“Our view is no [it won’t reignite inflation]. Instead, we’d argue that it would create the environment for a steady economic recovery,” Cunningham said. “A bit of stability is just what we need – giving us all room to go about the business of rebuilding our battered economy.”

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