Another OCR announcement and another OCR cut. This is great news, of course.

But, just how great is it for your mortgage?

How much could you save and what is the best strategy from here?

Let’s answer all those questions now.

The Situation As It Stands

In their last OCR review of 2024, the Reserve Bank announced that they were cutting the OCR by a further 50 basis points, lowering it to 4.25%. They have also indicated that there will not be any further reviews until 19th February 2025. So, this most recent OCR cut was the last attempt to rejuvenate the economy for some time.

The previous OCR cuts do seem to be having an effect on the property market already. ‘In terms of mortgage numbers the total number of 19,273 loan commitments in October was the biggest in a single month since December 2021.’ Along with this proof of increased lending, the Reserve Bank is confident the housing market is recovering. It is forecasting house price growth of -0.2% for 2024, but feels the market will then increase, peaking at 7.4% growth in March 2026.

So, what does all that mean?

Basically, because the OCR and other factors are contributing to lower interest rates and there have been recent changes in lending conditions, the property market is picking up again. There is more confidence in the market with lower mortgage rates in play and probably further cuts to come.

This is good news for a lot of groups – first home buyers may be able to enter the market, people who were holding off on property moves might now be able to make them, and those with existing mortgages will see some relief in their interest rates.

How Far Will Interest Rates Drop?

Unfortunately, it is unlikely that we will see a 0.5% drop in all interest rates to match the 0.5% OCR reduction. As we have discussed before, the OCR is just one of the factors that impact mortgage rates here in NZ. There are a whole bunch of other factors to consider.

Currently, NZ’s economy is still sitting on the cusp of recession. We are either just in one or barely out of one. And global economies are not really fairing much better than ours. The USA is planning large tariffs on goods entering from Canada, Mexico and China, and the USA, UK and Australia are all facing stubborn inflationary pressures.

All of this is impacting the domestic cost of borrowing money for our major lenders. So, that is blocking the potential for large cuts on fixed mortgage rates currently.

All hope is not lost though. With a flurry of rate cuts on the eve of the latest OCR announcement and further cuts since, mortgage rates are still tracking down. There just isn’t the scope for huge cuts yet. It is likely that the longer term rates will remain high, with greater scope for movement in the shorter term rates.

How Much Could You Save?

Whenever interest rates start to go down, one of the biggest questions mortgage advisers get asked is, ‘Should I break my current mortgage rate so I can get a better one?’ The right answer to this question will vary depending on your personal circumstances.

When you agree to fix your mortgage at a certain rate for a set term, you are signing a contract with your lender. If you want to break that contract to try and save yourself money, you need to recognise that the lender may lose money. For that reason, they may charge what is known as a break fee to recoup any lost profit.

The amount of the break fee will depend on:

1. The amount being repaid: The larger the amount, the higher the potential fee.
2. The remaining term of your fixed-rate loan: The longer the remaining term, the higher the fee may be.
3. The difference in interest rates: If current interest rates are lower than your fixed rate, the break fee will be higher.

For example, if you locked in a fixed mortgage rate of 5% but current rates are now 3%, the lender loses the extra 2% in interest for the remainder of your fixed term and would charge accordingly. That means, if you are considering breaking a fixed mortgage rate, you will need to weigh up whether the cost of a break fee will negate any potential savings you might get from fixing at a lower interest rate.

The best thing to do is to have a chat with a trusted mortgage advisor, like the team here at Mortgage Suite, before making any decisions. We can give you an indication of what to expect and whether breaking your current fixed term might be worth it.

What Should Your Mortgage Strategy Be?

There is always a lot to think about when it comes to your mortgage. Usually one of the biggest investments in your life, you want to make sure you have a strong strategy in place regardless of what your long term plans are.

For existing mortgage holders looking to refix: With interest rates predicted to fall further throughout 2025, the 6-month and 1-year rates are probably looking pretty attractive right now. The short term rates are popular because it means you can capitalise on any further reductions quickly.

For first home buyers: Now is an excellent time to enter the market as there are many listings available, interest rates are more reasonable than they have been in a long time, and lending conditions are more favourable.

For property sales and subsequent purchases: The same sentiment applies as for first home buyers, now could be a good time to make that move you had been considering.

For investors: DTI rules that came into effect in July could impact investment portfolio opportunities, but this could still be a time to explore your options.

The best advice we can give is to discuss your plans with a trusted mortgage adviser. Here at Mortgage Suite, we would welcome the opportunity to have this chat with you. Once we understand more about your situation, we can provide tailored advice to help you make the best decisions regarding your mortgage and also help you achieve your goals. Contact us now.