Significant turning point for home loans

A growing number of New Zealand mortgage holders are expected to encounter higher borrowing costs over the next six to 12 months. This trend appears likely to persist regardless of the immediate decisions regarding the official cash rate (OCR) this week.

A Turning Point for Borrowers

Kelvin Davidson, Chief Property Economist at Cotality, indicates that the market has reached a significant turning point. For the past two years, many borrowers benefited from staying on short-term fixed rates, which allowed them to repeatedly reprice as rates fell.

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However, this strategy is becoming less effective. Market mortgage rates are rising in anticipation of medium-term OCR increases, altering the financial landscape for homeowners.

Did You Know? Approximately 43 percent of existing mortgage debt is currently floating or fixed and scheduled to reprice within the next six months.

Shifting Lending Preferences

Recent Reserve Bank lending data reveals a change in borrower behavior. Floating and short-term fixed lending have declined in popularity over the last six months.

In contrast, the two-year fixed rate has emerged as the most popular choice, representing 29 percent of new lending in March. Borrowers are increasingly prioritizing repayment certainty as refinancing conditions become more volatile.

The Cost of Refinancing

Analysis shows that those who opted for very short durations recently are already encountering higher costs. For example, homeowners who fixed for six months in October at approximately 4.8 percent may now face a two-year rate of roughly 5.1 percent.

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This represents an increase of about 30 basis points. Davidson notes that this shift in mentality occurs as borrowers realise they may have already missed the lowest point of mortgage rates.

Expert Insight: Samantha Carter observes that the pivot toward two-year rates suggests borrowers are now more concerned with avoiding potentially worse rates in the future than they are with maintaining flexibility. This indicates a broader market shift toward risk aversion in the face of uncertain refinancing conditions.

Broader Economic Implications

While these are individual financial decisions, the cumulative effect could impact the wider economy. Increased mortgage payments may reduce available household spending, particularly as consumers face additional pressures from higher fuel prices.

This environment could create a more complex challenge for the Reserve Bank. The institution may have to weigh persistent inflation pressures against a backdrop of softer consumer demand and weaker economic growth.

Frequently Asked Questions

Why is the strategy of using short-term fixed rates now less effective?
Previously, borrowers could reprice onto lower rates as they fell. Now, market mortgage rates are rising ahead of expected medium-term OCR increases, meaning new rates may be higher than previous ones.

What is the current most popular mortgage term in New Zealand?
The two-year fixed rate is currently the most popular lending term, accounting for 29 percent of new lending as of March.

How might rising mortgage costs affect the general economy?
Higher mortgage repayments could lead to decreased household spending. This may complicate the Reserve Bank’s efforts to manage inflation while dealing with weaker growth and softer demand from consumers.

How are you adjusting your long-term financial planning in response to shifting interest rate trends?