New Zealand Mortgage Rates: What to Expect in 2025
by: Scott Mears
As we enter 2025, New Zealanders are seeing a promising shift in the mortgage landscape, with experts forecasting significant drops in home loan rates. Recent reports, such as those from RNZ and Interest.co.nz, paint an optimistic picture for borrowers as the Reserve Bank of New Zealand (RBNZ) looks to adjust the Official Cash Rate (OCR), and lenders adjust their offerings in response. But what do these changes mean for homeowners and potential buyers? Let’s dive deeper into the forces shaping New Zealand mortgage rates and what you can expect over the next few months.
A Big Change on the Horizon
New Zealand’s housing market and the broader economy have been on a rollercoaster in recent years, with mortgage rates at highs following the RBNZ’s aggressive hikes to tame inflation.
However, as inflation shows signs of easing, the OCR – a key lever for controlling interest rates – is also expected to come down. According to experts, we are likely to see mortgage rates fall significantly, potentially dipping below 5% in the coming months.
The RNZ report suggests that with a decline in the OCR anticipated in early 2025, many homeowners can expect mortgage rates to drop from their current levels, which are still hovering above 6% for many. This shift could provide much-needed relief for borrowers who have been grappling with high repayments.
How Big Will the Rate Cuts Be?
The major question on the minds of homeowners and prospective buyers is: How much will mortgage rates drop? Interest.co.nz’s discussion points to expectations of a reduction in home loan rates, starting as soon as February (the time of the next OCR announcement).
Both the RNZ and interest.co.nz articles highlight that financial markets are already pricing in substantial rate cuts, with rates for some fixed-term loans potentially slipping well below the 5% mark before the end of next year.
Some analysts speculate that we could see mortgage rates return to levels similar to those seen during the pre-pandemic era, before inflation started to spiral out of control. For example, as recently as mid-2020, interest rates for a five-year fixed-rate mortgage were in the 2.5-3% range. While those rock-bottom rates may be a thing of the past, the predicted drop in 2025 could still bring significant relief to many households.
The Official Cash Rate Price History (source: Reserve Bank of New Zealand).
Why Are Mortgage Rates Set to Fall?
Several key factors are driving the anticipated fall in mortgage rates:
Decreasing Inflation: Inflation has been the key driver of the RBNZ’s rate hikes over the past two years. With inflation beginning to ease, the central bank has room to lower the OCR. Lowering the OCR should, in turn, reduce borrowing costs for banks, which can pass on these savings to consumers.
Slowing Economic Growth: New Zealand’s economy has shown signs of slowing down, partly due to the high cost of borrowing in the last two years. The RBNZ is aware that further rate hikes could stifle economic recovery, so a cautious approach to rate cuts may be on the cards as the bank tries to stimulate growth.
Global Trends: The global economic environment is also influencing New Zealand’s outlook. Many central banks worldwide, including the Federal Reserve in the United States, are expected to slow or pause interest rate hikes. Global trends often have a ripple effect on local interest rates, as investors shift their focus to safer assets like New Zealand bonds, which also influence mortgage rates.
Improved Banking Conditions: As the OCR is expected to decrease, the cost of funding for banks will also lower. With this reduced cost of borrowing, banks can pass on savings to customers in the form of lower mortgage rates.
What Does This Mean for Homeowners?
For homeowners, the potential reduction in mortgage rates offers a much-needed breather. Borrowers on variable rates, who have faced substantial repayments in recent years, could see their monthly mortgage payments decrease significantly.
Fixed-rate borrowers coming off their existing fixed terms may also find themselves in a more favorable position, with lower rates available as they look to refinance.
However, while the outlook is promising, there are still uncertainties. Inflation is still present in some areas of the economy, and the global economic climate remains volatile. Borrowers should remain cautious and avoid overextending themselves, even if rates fall.
How to Take Advantage of Lower Rates
If you're currently on a variable rate or nearing the end of your fixed-term mortgage, now may be the right time to explore refinancing options. There are a few strategies homeowners can use to maximise the potential savings:
Refinance to a Shorter Term: If you’re in a strong financial position, refinancing to a shorter mortgage term could reduce your overall interest payments while capitalising on the lower rates.
Review Your Lender's Offers: Mortgage lenders are likely to adjust their rates quickly once the OCR cuts take effect, so it’s worth staying informed on new offers. Being proactive can ensure you get the best deal available.
Consider Your Financial Future: While lower rates are an opportunity to reduce costs, it’s important to consider your long-term financial strategy. If you're planning to sell, or if your income situation is unstable, it may be wise to take a more flexible approach.
Conclusion
New Zealand’s mortgage market is on the cusp of a significant shift. With the RBNZ expected to lower the OCR and mortgage rates potentially falling below 5%, 2025 promises to offer borrowers some much-needed relief. Whether you're a homeowner looking to refinance or a potential buyer waiting for the right moment, the next few months could be a great time to make a move.
While the road ahead looks promising, it’s important to stay informed, consider your financial situation carefully and work with your mortgage advisor to ensure you’re getting the best possible deal as rates start to drop. The key to taking advantage of these changes is staying ahead of the curve and making decisions that align with your long-term financial goals.