Mortgage rates are dropping

What you need to know about the Reserve Bank's surprising move

“They should be saying they were completely and utterly wrong,” is how top economist and Infometrics Chief Economist Brad Olsen has described the Reserve Bank going from stating that there was a 60% chance of a future OCR hike at their review in May to a 25-basis point cut (0.25%) on August 14th.

Adrian Orr hasn’t done his credibility any favours with such a complete change of direction in a short time frame, especially with most key data coming through since May (updated inflation and unemployment numbers, in particular) hitting relatively close to the Reserve Bank’s predictions.

The positive is that the rate cuts have started, and the banks immediately started cutting mortgage rates thick and fast.

Most banks have reduced rates across the whole spectrum, from variable to the 5-year fixed rate, which has seen relatively significant drops. With the cash rate now having dropped to 5.25% from the 5.50% it has been sitting at since May last year, the next question will be how fast the drops continue.

While for the reasons above, it is hard to take the Reserve Bank too seriously at present, their own forecasts suggest that there should be at least one more cut before the year ends, and the more likely result is that we will see cuts at both the October 9th and November 27th review dates.

The cuts are likely to keep coming across next year, which will be warmly welcomed by those connected to the real estate market with investors now likely to increase their presence with some growth now likely across next year on the back of the lower rates.

We should also see some competition heat up in the banking space, with Spring traditionally resulting in the banks competing harder for market share.

While we are still largely favouring the 6-month fixed rate, although it is the highest fixed rate option at present, we expect that by rolling 6-month terms, borrowers should, in most cases, be better off rather than taking the marginally cheaper 12-month option or the 24-month option, which may look at face value to be considerably cheaper, but if forecasts prove to be correct, this may look expensive in 6-12 months’ time.

It is worth noting though that with bank competition increasing some other specials could be worth considering as we have seen some 18-month rates as low as 5.79% and have recommended this over the same bank’s 6-month rate.

For this client, compared with what their existing bank was offering rate-wise and the cash contribution they managed to get by moving, they will end up over $13,000 better off from the move than staying with the existing lender.

Make sure you use the opportunity to grab a great deal. If you’d like to have your situation reviewed please contact me HERE.

About the author: Kris Pedersen is a leading figure in mortgage advising and property investment, consistently ranked among the country's top six mortgage advisers for the past four years. With over a decade of experience, Kris is the preferred choice for investors seeking expert guidance to expand their portfolios. He shares his insights as a respected speaker at Property Investor Association groups, and his expertise extends to New Zealand and overseas property and finance markets, with regular features in NZ Property Investor Magazine. Kris Pedersen and Kris Pedersen Mortgages Limited are registered financial service providers, ensuring transparency and reliability in all financial dealings. Their credentials on the Financial Service Providers Register can be viewed here: https://fsp-register.companiesoffice.govt.nz/