Interest rates: Borrowers try to second guess Reserve Bank

By earthnews
7 months Ago

Interest rates: Borrowers try to second guess Reserve Bank

Navigation for News Categories

Photo: RNZ

Local borrowers are trying to second-guess when the Reserve Bank (RBNZ) will start cutting interest rates by moving to shorter term mortgages, even though it will cost them more, according to a new report.

Property research firm CoreLogic’s latest housing report shows 56 percent of new housing loans in February were fixed for one year, compared to 36 percent in December.

Chief economist Kelvin Davidson said borrowers have decided mortgage rates have peaked and were headed lower, which was driving the trend to short-term loans.

“The perfect borrowing strategy is only ever known in hindsight, but the trend to fix in the short-term reduces the risk of overpaying later, if and when mortgage rates drop.

“Of course, given that one-year fixed rates are currently higher than longer terms, it does mean paying more now,” he said.

One-year fixed rates are currently about 7.24 percent, with two years at 6.75 percent, and floating rates, which react quickly to OCR moves, at about 8.5 percent.

Rate cut timing uncertain

Davidson said it was still highly uncertain when the Reserve Bank would start cutting its official cash rate.

“Inflation remains a concern and the Reserve Bank doesn’t seem inclined to lower the official cash rate anytime soon. Other factors matter, such as offshore financing rates, but lower mortgage rates look more likely to occur in 2025 than 2024 at this stage.”

The annual inflation rate eased to 4 percent at the end of March from 4.7 percent, but the details of the numbers showed that domestic prices – such as the costs of building a house, energy, rents and rates – remained high and were underpinning overall inflation, casting doubt on any rate cuts this year.

The RBNZ’s last monetary policy statement in February hinted at rate cuts possibly starting as late as June next year, while financial markets have scaled their bets to November this year.

Davidson said rates were likely to fall more slowly than they rose, but he could see them settling around the 5/5.5 percent level in due course.

Meanwhile, he said the property sector was set to remain sluggish going well into next year. Corelogic’s house price index gained 1.1 percent in the first quarter.