Editorial: Mortgage rates are coming down - but is the lowest rate really the best deal?

Mortgage rates have started to ease in anticipation of the first cut to the official cash rate. Photo / Alex Burton

Editorial

EDITORIAL

There are signs that the number of households getting behind on their payments is starting to stabilise as people adjust to higher interest rates but businesses are not out of the woods yet.

Latest data from credit bureau Centrix shows 9000 fewer people were behind on their financial commitments in June compared to May, although there were still 9% more borrowers who were behind compared to June last year.

Mortgage interest rates have risen sharply in recent years catching many borrowers by surprise and proving to be particularly painful for those who bought property in the 2021 boom where rates dropped as low as 2.5%.

Mortgage rates have already started to fall ahead of expectations that the Reserve Bank will cut the official cash rate (OCR) later this year. All the major banks cut their rates last week and some have followed it up by a second rate cut.

Some like the ANZ are offering tantalising rates of 5.99% for three years. That sounds attractive in comparison to rates that are around 6.99% for shorter fixed terms and some won’t have any option but to lock themselves in for that in order to make their budgets work.

But the risk of locking in for three years is that rates could begin to drop quite sharply in the next year. Economists are penciling in the first OCR cut in November but this could be followed by successive cuts in February and March.

Westpac economists are forecasting the OCR to be cut by 100 points by mid-2025 which would put it at 4.5% and then see it continuing to fall to 3.75 per cent by early 2026.

No one is suggesting mortgage rates will go back to the record lows seen in 2021. But they could be back in the mid to high fives by the end of next year, depending on the margins banks decide to take.

On a $500,000 mortgage a 6.99% interest rate will cost the borrower $815 a week but drop that down to 5.5% and weekly repayments fall to $708 a week - that’s more than $100 extra in the pocket a week. A change like that will have a much bigger impact on household budgets than the Government’s tax cuts which top out at $20 a week.

While the number of people going into arrears might not be growing there are around 13,500 credit accounts in financial hardship and nearly half (45%) are finding it hard to make mortgage payments.

Mortgagee sales have ticked up but remain at very low levels, especially when compared to the aftermath of the Global Financial Crisis when record numbers of homes went to mortgagee sale.

But property listings are at record highs with many of those who bought during the 2021 property boom trying to sell up. Easing mortgage rates will help borrowers and that will also flow into businesses.

The retail and hospitality industries have been feeling the pain with a number of high-profile businesses going into liquidation. Those who can manage to hold on for another six months will come out leaner and hopefully better able to cope the next time New Zealand goes through a downturn.