In August 2024, the Reserve Bank finally did what all mortgage holders were hoping for and made a minor cut to the OCR.

This triggered a flurry of interest rate cuts from all mortgage lenders. Many of the longer term rates snuck under 6% for the first time in ages.

So, why are these longer term rates lower than the short term ones and should you be taking them?

Let’s answer those questions now.

Why Are The Longer Term Fixed Rates Lower?

Currently, the longer term mortgage rates are lower than the shorter ones, but that is not always the case. This situation has come about because of the current economic conditions and market expectations. There are a few reasons why this has happened:

1. Market Expectations: When the OCR is predicted to decrease, lenders often price their longer term rates lower. That’s because they know their borrowing costs will drop over time. It makes offering more attractive long term rates less risky when it comes to fluctuating costs, they know they are not likely to lose money on the lending.
2. Inflation: When inflation is set to decrease, long term rates can be set lower as lenders can have confidence that inflation will not erode the value of the money they lend. Lower inflation expectations reduce the pressure on future interest rates, meaning longer terms can be set at a lower rate.
3. Bank Funding Costs: NZ banks source their funding from domestic and international markets. So, the cost of borrowing money can be influenced by global and local markets. If the cost of obtaining long term funding is cheaper than short term, the interest rates will reflect that.
4. Competition: In a slow property market, there are only a small amount of new borrowers entering the market. So, lenders aggressively competing for market share will reduce their long term rates to appeal to borrowers looking for long term stability.

As you can see, no one thing will create lower long term rates. It’s all about lenders managing their risk profile, ensuring they cover off future uncertainties. In a declining market, we can expect the longer term rates to be cheaper than the short term rates, and vice versa in a rising market.

So, should you take the long term rates now?

Should You Fix Long?

As interest rates are expected to reduce further in the coming months, we would not necessarily recommend fixing for a 5-year term now. Of course, everyone’s circumstances are different, so the only way to get the best rate for your finances is to discuss your options with a mortgage adviser.

It wasn’t so long ago that the Reserve Bank was saying the OCR would not be cut until 2025. But, with weaker than expected economic conditions, they made the move to cut the OCR from 5.5% to 5.25% in August. In the wake of that announcement, economists tipped there could be further reductions of 25 basis points in both the October and November reviews.

As the weeks have progressed, sentiment has intensified and economists are predicting that an October rate cut is all but a certainty. They are saying the only discussion the Reserve Bank should have is whether that cut should be 25 basis points again, or bumped up to a cut of 50 basis points.

Why are we expecting these big cuts now when they were not on the cards two months ago? Well, it seems inflation has largely been tamed by the extended period of restrictive monetary policy, expected to fall within the targeted range of 1-3% in the September quarter. Inflation was the key driver for keeping the OCR high, so now that it is thought to be under control, rates can drop again.

So, in answer to the question of whether you should fix long now, we would probably caution against it as if the current trajectory continues, rates will continue to drop in 2024 and 2025.

Why Don’t We Have 30 Year Rates?

It’s interesting to look at other markets around the world to see how they compare to ours. The USA has a completely different mortgage market. It’s commonplace for Americans to lock in a 30-year term for their mortgages.

However, instead of their longest term rates being the smallest, like they currently are in NZ, they tend to be more than the shorter 10, 15 and 20 year rates. That is so the financial providers can cover the risk of rate movement within that huge term.

But, why don’t we have 30-year rates here in NZ? Imagine the joy of locking in a 30-year term at the glorious post-pandemic rates of 2%! That very point is part of the reason why our NZ lenders cannot provide fixed term rates for that long.

New Zealanders love a fixed term mortgage, in fact, 90% of all Kiwi mortgages are on fixed terms. But, we fix for shorter terms to play the market. You’d be hard pressed to find a fixed term longer than 5 years in NZ.

That’s because banks and other lenders need to protect themselves against future interest rate movements where rates may move above what the borrower has agreed to pay. Our mortgage market simply cannot sustain big gaps between borrower repayments and the cost of bank lending. The US market has the size and scale to weather the ups and downs of the wholesale mortgage market.

How Long Should You Fix For?

Here in NZ, we will have to stick with 5-year terms, with 30-year options not available to us. But, as we’ve just mentioned we wouldn’t recommend long fixes in a declining market. While those 5% figures might look attractive now, they will look less attractive as rates track down further in the coming months.

What we would recommend is chatting to a mortgage adviser about your current structure and the rates available to you. Often, mortgage advisers can secure rates that are better than the standard advertised figures, so we’d love to see how we can help you fix for the right term.

Contact the team at Mortgage Suite today for a free no-obligation chat.