Will home loan rates drop below 4%?

Home loan interest rates continue to drop as the Reserve Bank pursues its path to a lower official cash rate, and wholesale markets fall.

But with almost half of New Zealand’s home loans floating or due to refix within the next six months, many borrowers may be wondering just how much further rates could go.

Is it possible that we could see them drop below 4%?

Here are the arguments for and against.

Yes

On one hand, David Cunningham, chief executive of Squirrel, says yes.

He said, if the official cash rate (OCR) dropped to 2.25% next month, as many expect it will, one-year home loan rates should creep below 4% in early 2026.

He said factors that affected the one-year rate included wholesale swap rates, which generally reflect where the markets expect the OCR to go, and what banks were paying households and businesses that deposited money with them.

“The catalyst for further reductions will be the banks continuing to lower their term deposit interest rates, and the gradual flow-through to lower overall bank funding costs.”

He said Squirrel had built an AI model to help predict interest rates, based on wholesale rate data.

“Looking backwards the outputs of the model are pretty consistent with what we’ve seen in reality, in terms of how wholesale rates fluctuations have flowed through to actual mortgage rates in market.

“Looking ahead – and assuming economists and the wider market are right in thinking the OCR will drop to 2.25% in late November – the model shows that we’re likely headed for a sub-4% one-year fixed mortgage rate sometime early next year.”

He said while the modelling showed a one-year fixed home loan rate just above 4%, banks liked to offer rates ending in .99 to get customer attention.

“It’s a psychological tactic called ‘charm pricing’ – which says that, at a glance, 3.99% sounds like a far better deal than 4%.

“We reckon that if the one-year mortgage rate drops close to 4%, sooner or later one of the banks will want to claim bragging rights to a rate below 4%.”

Her said the two-year rate was likely to remain higher.

Mayne not

Infometrics chief forecaster Gareth Kiernan said a rate below 4% seemed a stretch.

“The last time interest rates were coming down, in 2019, rates got under 4% in March, with the OCR at 1.75% – it had been at that level for over two years – and the Reserve Bank was on the verge of starting on another round of cuts that would ultimately take the OCR to 1% by August that year. “

He said another 25 basis points off the OCR did not look like enough to get any of the wholesale rates down enough to get a rate under 4%.

“Particularly when longer-term rates seem to be more well-anchored at higher levels. I think you’d need to get an OCR of 2% before sub-4% becomes a possibility, at least from the big five banks – sometimes the smaller lenders can go a bit more off-piste with their rates to try and attract a bit of attention.”

Kiernan earlier said he expected home loan rates to start picking up again in about October next year.

rnz.co.nz