Of all the mortgage debt people took out during June, 40% was fixed for a year. Photo / NZME
Mortgage rates may be near their trough in this cycle, but most borrowers are still not locking in rates for longer terms.
There was a surge in the uptake of one-year rates in June, according to the latest Reserve Bank data.
Of all the mortgage debt people took out during the month, 40% was fixed for a year.
Meanwhile, 25% of the debt was put on a floating rate, 11% was fixed for two years, 10% for 18 months, 8% for six months and 5% for three years.
At the end of last year, the vast majority of borrowers either put their mortgages on floating rates or fixed their debt at a rate for a year or less.
Borrowers were waiting for interest rates to fall before locking in rates for slightly longer terms.
The latest data show that by June, borrowers had moved towards slightly longer-term rates, but were still giving themselves flexibility. Indeed, locking in a two-year rate wasn’t a very popular option.
Economist Tony Alexander, who does a regular survey of mortgage brokers, believed borrowers snatched one-year rates, because they were the most attractive in June.
He believed borrowers didn’t feel the need to lock in two- or even three-year rates, because they didn’t see interest rates being higher in a year’s time when they came to refinance.
Rightly or wrongly, they simply chased the most attractive rate.
“It’s the Kiwi way,” Alexander said, noting that banks in New Zealand compete most aggressively in the shorter-term mortgage rate market.
In March and April, two-year rates became quite popular – again, because banks offered attractive rates at these terms.
The June data suggests borrowers didn’t opt for the stability of a two-year rate on the back of the Reserve Bank in May surprising some observers by suggesting it might slow its Official Cash Rate (OCR) cuts.
One of the bank’s Monetary Policy Committee members wasn’t in favour of cutting the OCR at the time, noting the uncertainty around where the United States would set tariffs and how this would impact inflation.
The committee still cut the OCR in May, but kept it at 3.25% when it met in July. It confirmed further cuts were still likely.
Like Alexander, Cotality New Zealand chief property economist Kelvin Davidson believed that in June, borrowers might have been more fixated on locking in attractive rates than acting on the slight change of tack in the Reserve Bank’s commentary.
He believed some may have simply opted for flexibility. Indeed, there was a record amount of bank-switching in June, as borrowers chased cash contributions banks offered new customers.
Furthermore, by late June, the sluggishness of the economy may have given some borrowers the impression more rate cuts were surely on the way.
“People are still hedging their bets,” Davidson said.
Both he and Alexander noted how in 2020 and 2021, most borrowers didn’t take the opportunity to lock in exceptionally low rates for longer terms.
They questioned whether the same situation was playing out now, but neither could see interest rates shooting up in the near future as they did after the Covid era of extremely loose monetary policy.
While many in the business community, including former Prime Minister Sir John Key, are urging the Reserve Bank to cut interest rates more aggressively to stimulate growth, Alexander wanted to remind people that the Reserve Bank’s job was to keep inflation in check, not target the optimal level of growth.
Accordingly, he believed it couldn’t cut the OCR much more, as this would create too much inflation.
Davidson, on the other hand, believed the Reserve Bank would look through near-term inflation risks caused by tariffs and cut the OCR further.
The rate will be next reviewed on August 20.
The lowest New Zealand economists typically see the OCR going is 2.5%.
Because cuts have been well-signalled, banks have largely priced them into mortgage rates on offer now.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the Parliamentary Press Gallery. She specialises in government and Reserve Bank policymaking, economics and banking.