A typical new borrower is now about $270 a month better off thanks to drops in interest rates.
BNZ chief economist Mike Jones said the average mortgage rate paid in June was 5.66%.
That is down from 6.39% when rates were at the highest point of this cycle.
He said it was likely that the average rate being paid would drop to 5% by the end of the year.
At a rate of 6.39%, the average new first-home buyer mortgage of $575,000 would cost $3593 a month or $829 a week.
At a rate of 5.66%, that drops to $767 a week or $3323 a month.
Jones said borrowers had passed “peak short”, where everyone refixing was opting for very short terms in the expectation of falling interest rates.
“The share of outstanding fixed-rate borrowings with remaining terms of six months or less has declined from the highly concentrated 44% as of January, to 36% as at June.
“There’s now a slightly higher share with remaining fixed terms of six to 12 months, while the share in the one-to-two years bucket has lifted a solid six percentage points from January.
“The broad conclusion is that mortgage positioning is still shorter than average, but it’s more balanced than it was.”
He said about $135 billion of mortgages would refix over the next six months, or about 41% of all outstanding fixed-rate mortgage debt.
Jones said there were indications borrowers were not always simply choosing the cheapest rates each time they came to refix.
“Borrowers – in aggregate – appear much more inclined to absorb what might be unfavourable upfront cost relativities to position themselves to potentially benefit long-term as we move through an interest rate cycle.
“For example, borrowers shortened their borrowing terms well ahead of the RBNZ’s latest easing cycle, despite the extra upfront costs of doing so at the time, with short-term rates above long-term. That proved prescient as rates were subsequently cut aggressively. But as the easing cycle has advanced, borrowers have now started to push out for longer terms even though longer-term rates are above shorter-term equivalents, for the most part.”
He said he expected the official cash rate to drop to 2.5%.
“There still could be an element of the Reserve Bank feeling its way to the bottom of the cycle. Whatever the exact low point turns out to be, we are edging onto the home stretch for the easing cycle. Borrowers’ small step away from shorter fixed terms appears consistent with this.”
He said there was unlikely to be a rush for longer-term fixes.
“Not while the RBNZ maintains a bias to lower interest rates further, the economy remains weak, and the risk of rate hikes remains a long way off. Our read of mortgage rate ‘break-evens’ (comparing our interest rate forecasts to implied market pricing) is also consistent with the idea that borrowers have some time up their sleeve.”
rnz.co.nz
