A dramatic shift in New Zealand mortgage preferences unfolded in December , as homeowners reacted swiftly to signals from the Reserve Bank of New Zealand (RBNZ) that further cuts to the Official Cash Rate (OCR) were unlikely. After a surge in floating rate mortgages in November, driven by expectations of continued easing, December saw a pronounced move towards fixed-rate terms, particularly the two-year option.
Data released by the RBNZ reveals that witnessed a resurgence in popularity for two-year fixed rate mortgages, capturing 23.2% – equivalent to $2.15 billion – of new owner-occupier lending. This represents a significant increase from the 10.6% share recorded in November and marks the highest proportion for two-year terms since .
The shift followed the RBNZ’s decision to lower the OCR by 25 basis points to a cycle low of 2.25%. While a cut was expected, the accompanying messaging – indicating a potential end to the easing cycle – surprised financial markets. This led to an immediate upward adjustment in wholesale interest rates and, subsequently, some mortgage rates, prompting borrowers to secure longer-term fixed rates.
The impact on floating rate mortgages was substantial. In November, floating rates accounted for 47.4% of new owner-occupier mortgage money and 49.4% of all new mortgage money. However, by , this figure plummeted to 20.6%, indicating a significant retreat from the previously favored variable rate option.
Beyond the two-year term, longer-dated fixed rates also experienced increased demand. Three-year fixed rate mortgages saw their share rise to 11.8%, the highest level since , with over $1 billion allocated to this term. One-year rates held relatively steady, accounting for 21.9% of new lending, a slight decrease from November’s figure.
The overall trend towards fixed rates was pronounced. The share of total new residential lending on fixed interest rate terms increased to 78.2% in , a substantial jump of 27.6 percentage points from the previous month. This indicates a widespread desire among borrowers to lock in rates and mitigate the risk of future increases.
Investor behavior mirrored the trend observed among owner-occupiers. Floating rate mortgages for investors decreased from 53.4% in November to 23.2% in . The share of two-year fixed terms for investors increased significantly, rising from 7.7% in November to 20.5% in . One-year fixed terms accounted for 21.9% of new investor lending, a slight increase from 21.7% in November.
The surge in mortgage activity in extended beyond simply choosing between fixed and floating rates. The RBNZ data also highlighted a significant level of customers switching loan providers, resulting in a substantial volume of new mortgages being drawn down. This suggests a competitive lending environment and borrowers actively seeking more favorable terms.
The rapid shift in mortgage preferences underscores the sensitivity of borrowers to RBNZ signaling and market expectations. The unexpected messaging accompanying the OCR cut served as a catalyst for a dramatic recalibration of risk appetite, with borrowers prioritizing the certainty of fixed rates over the potential benefits of floating rates. This dynamic highlights the crucial role of central bank communication in shaping financial behavior and influencing mortgage market trends.
The implications of this shift are multifaceted. For lenders, it presents a challenge in managing interest rate risk and adapting to changing borrower demand. For borrowers, it offers a degree of protection against potential rate increases but also locks them into a specific rate for the duration of the fixed term. The extent to which this trend will continue remains to be seen, but the RBNZ’s actions have had a profound and immediate impact on the New Zealand mortgage landscape.
Recent data also suggests that mortgage arrears are falling, potentially linked to the rate relief experienced by some borrowers. However, the possibility of renewed mortgage pain before the end of the year remains, as highlighted by recent analysis, suggesting that the current period of relative stability may not be sustained.
