Photo: RNZ

The official benchmark interest rate (OCR) has been lowered and banks have cut many of their mortgage rates.

But how far will mortgage rates actually fall given the declining interest rates forecast for the next few years?

And how long is it worth waiting for a better offer?

As part of its updated forecasts, the Reserve Bank said in its latest monetary policy statement that it expects the OCR to fall to below 4 percent by the end of next year and to 3 percent by mid-2027.

Gareth Kiernan, chief forecaster at Infometrics, said he expects a 25 basis point cut at each meeting between now and the middle of next year, and some cuts in the second half of 2025.

He said plugging the bank’s OCR history into Infometrics’ interest rate model showed that the interest rate on a one-year home loan could be around 5.4 percent by early 2025, 5.5 percent for a two-year fixed-rate mortgage, 6 percent for a three-year term and 6.1 percent for a four-year term.

The five-year fixed rate would be 6.3 percent and the variable rate would be 6.67 percent.

“However, there are two caveats to these numbers. First, the Reserve Bank does not publish other interest rate forecasts, so I have maintained our longer-term wholesale interest rate forecasts, which predict a 10-year government bond rate of around 4.2 percent in early 2027 – a rate no lower than the current rate. This component limits the decline in longer-term fixed rates.

“Secondly, banks’ margins on retail mortgage rates appear to be unusually low at present. This could be due to weak demand for credit, which in turn is prompting banks to lower their interest rates in order to lend.

“I expect these margins to return to normal over the next 18 months, meaning banks will pass on less of the rate cuts to borrowers over that period.”

However, he said that with an OCR of 3 percent, if margins remained at their current levels, a fixed rate of 4.9 percent for one year, 5 percent for two and three year rates and 5.1 percent for four and five year rates could be expected.

Sabrina Delgado, economist at Kiwibank, expects the OCR to fall more than the Reserve Bank has forecast – it predicts a 2.5 percent decline by mid-2027.

However, she said retail interest rates would be affected by developments in term deposit rates and other funding costs.

“We expect mortgage rates to be close to 5 percent, possibly even higher, depending on how far term deposit rates fall.”

“The last time we hit an OCR of 2.5 percent, before and after the earthquake, term deposit rates rose to 4 percent and mortgage rates fell to 5.5 percent. Then in 2018, the OCR fell to 1.75 percent and we hit 5 percent mortgage rates. Of course, during Covid, all interest rates fell to the lowest levels in human history. Hopefully we won’t see that again.”

Chris Tennent-Brown, a senior economist at ASB, said the bank expected the OCR to be 3.25 per cent by the end of next year, when most fixed-term mortgages would be “comfortably below 6 per cent”.

Wholesale markets have priced in further cuts of 75 basis points for the remainder of the year.

In order to make a fixed interest rate for six months rather than one year a better deal, the six-month interest rate would have to be reduced from the current 7.01 percent to 6.59 percent, so that a fixed interest rate for two consecutive six-month terms would be a better option than a fixed interest rate for one year at 6.8 percent.

“If there is a 1:1 pass-through of the OCR cuts to the six-month rate – which is a pretty heroic assumption -,” Kiernan said, “it would be necessary to make two rate cuts in that period. That seems possible.”