It happened!

Mortgage holders nationwide rejoiced at the recent RBNZ decision to lower the OCR.

The slight reduction from 5.5% to 5.25% has triggered a wave of rate cuts from all the major lenders.

So, the question now becomes, how long should I fix for?

Is it best to pick the shortest term as rates are on the way down, or would a slightly longer term create more savings?

Let’s explore the answer to that question now.

The Decision We’ve All Been Waiting For

On the 14th August, the Reserve Bank announced that it was cutting the OCR to 5.25%. It was the welcome news that we’d all been waiting for.

The response from the banks was almost instant.

ANZ trimmed their rates within minutes of the OCR announcement and it has been a bit of a race to the bottom since then. As we always knew it would be, the OCR was a major driver for creating lower interest rates, but it’s been helped by favourable wholesale rates too.

So, just how far are these rates going to go down?

How Low Can It Go?

As long as inflation continues to behave, the Reserve Bank has indicated there are more OCR cuts to come. But how many will there be and when will they happen?

Each of the major lenders is expecting a relatively steady downward track. They are all predicting two more OCR cuts in 2024, one at each of the October and November meetings. Then, predicting a downward trend at future policy meetings.

What they don’t agree on is how low the OCR will get and how long it will take to get there. Predictions range from a low of 3.75% by the end of 2025 to a low of 2.5% by mid-2026. In the shorter term, updated forecasts are predicting that the OCR will fall to 4.9% by the end of the year.

While we don’t know the exact numbers yet, we can all celebrate the fact that we seem to be beyond the peak of this cycle and better days are coming for our bank accounts!

What Does That Mean For Mortgage Rates?

So, if the OCR does settle somewhere between 2.5% and 3.75%, what will that mean for interest rates and your mortgage repayments?

Let’s reflect back on what rates looked like the last time the OCR was at that point. The year was 2015 and there wasn’t a whisper of a global pandemic in the air! The OCR was sitting at a stable 3.5% which translated to an average 1-year rate of approx 5.9% and a 2-year rate of 6.1%.

Will we see the same rates again this time around?

Well, that’s a question that is a little harder to answer. It is hard to predict exactly where mortgage rates will land. What we do know is that homeowners with more than 20% equity in their homes and a good payment history will still continue to enjoy lower special rates than what are advertised on the bank websites.

But, how low will those rates be? It’s fairly safe to assume that we probably won’t enjoy the 2% rates seen during the pandemic as those were created in extenuating circumstances. It’s more likely that the one and two year mortgage rates will settle in the bracket of 5% and 6%.

With all that in mind, what is the best move for your mortgage right now?

How Long Should You Fix For?

With the promise of a downward trend in place, the question is, how long should I fix for in the current market?

As always, the answer to that question will depend on your personal circumstances and plans – such as whether you are planning to remain in your home long term, invest or upgrade to a different property. But, there are some general considerations that can help you make a decision.

Let’s talk long term rates. At this moment, they might look pretty attractive, after all those are the rates with the 5% at the start of the number! But, if mortgage rates continue to trend downwards for the next year or so, they might end up looking pretty expensive pretty soon.

Anything more than two years is potentially going to cost you more in the long run. There is a reason that the one year rate is always so popular. It might cost you a little more upfront, but it does allow you to be agile in a market when rates are trending down. Chances are, locking in a one-year rate now will give you some small savings on what you are currently paying and will allow you to capitalise on the upcoming cheaper rates that are being forecasted for 2025.

In saying all of that, we strongly recommend speaking with an experienced mortgage adviser before making any decisions regarding your interest rates. That way, you can receive expert, personalised advice about the best move for your family right now.

Here at Mortgage Suite, we would welcome the opportunity to chat about your plans and secure the best possible interest rate deal for your circumstances. Get in touch with us today for an obligation-free consultation.