In the last couple of weeks, the major banks have all announced reductions in their fixed term rates.

This is exciting news for borrowers and those with mortgage rates about to come up for renewal.

But, one factor remains constant… the OCR.

It has sat at 5.5% since May 2023. So, what is causing the mortgage rates to decrease?

Let’s look into that now.

Mortgage Rates Are Decreasing

Back on 11th July, Westpac was the first of the major banks to announce significant cuts to their fixed term mortgage and term deposit rates. They knocked 25 basis points off the popular one-year term to bring it down to 6.89%.

In the week that followed, the other major banks followed suit, reducing many of their fixed term rates also.

Then, in another shock move, just 14 days after they initially cut those rates, Westpac announced another round of rate cuts. This round of cuts were largely to match the rates their competitors had announced following the initial flurry.

We are eagerly awaiting a potential response from the other major lenders in the market to see who will be next to make the move to become the market frontrunner. As of 30th July, the major bank with the lowest 6-month rate was ASB with 6.99%.

So, why the sudden race to the bottom?

Why Are Mortgage Rates Going Down?

In previous months, we’ve indicated that the decision to move fixed term interest rates is largely tied to the OCR. But, the OCR has remained at 5.5% for the last eight Reserve Bank review sessions.

So, why are rates suddenly going down?

Well, there a couple of reasons for this. The first one is there’s a strong expectation that OCR cuts aren’t as far away as the Reserve Bank initially indicated. In their last policy announcements, they indicated things needed to remain restrictive until inflation is within the target band, meaning that the OCR would likely remain at its current level until the second half of 2025.

But, economists are not so sure this is the case. There are fears that the Reserve Bank may have gone too far with the restrictions and that OCR cuts need to made sooner rather than later. The general consensus around this is the cuts will come in November, but some are saying this could happen as early as August.

These recent fixed rate cuts could be a sign that the major banks are pre-empting an OCR drop with cuts of their own.

The second reason for the cuts could be because wholesale rates have “collapsed” in the last week. Wholesale rates are what banks are charged to borrow money from central sources. With the two-year swap rate hitting a low of 4.19%, it is the lowest rates seen in two years. It is thought the reduction has occurred thanks to market expectation that the Reserve Bank is planning OCR cuts sooner than they had initially indicated.

When the wholesale rates are lower, it costs less for the banks to borrow money. They can then pass those savings onto their customers, meaning the potential for lower interest rates.

When Will The Major Reductions Come?

It is very much a case of WHEN rate cuts will come now, not IF. This is great news for borrowers as interest rates are set to go down, but when will that be exactly?

That’s a question many people are asking while juggling the constant cost of living pressure. And it’s a question that might be particularly important to ask if you have a fixed term mortgage due for renewal soon.

As we mentioned earlier, the official prediction from the top economists is that we will likely see the first OCR cut in November. The feeling behind that prediction is that the Reserve Bank will want to see the latest inflation figures to confirm things are finally sitting in the 1-3% bracket they have been aiming for and these figures are not released until late October.

However with the economy continuing to look weak and June 2024 reporting the lowest number of new mortgages recorded since detailed data collection began, economists are suggesting that the OCR should be cut sooner.

However, due to the fact that the Reserve Bank indicated that rates increases may be required in their May 2024 announcement, it is unlikely they would do a complete 180 to introduce a cut in the August update. However, it’s not out of the realm of possibility!

What is more likely is a potential cut in October, as the Reserve Bank will be armed with reports about employment, GDP and business (which will give an updated view of how the economy is tracking) by then.

So, what is the verdict?

At this stage, the only thing that’s clear is that we don’t know anything definitely. The mentality of survive until 2025 is still very much alive! So, our recommendation would be to seek expert advice from the team here at Mortgage Suite before making any decisions about your mortgage.

We can offer tailored advice based on your financial goals and situation, aligned with what we believe is the best choice in the current market. Reach out to our team today for a no obligation chat.