New Home Loan Borrower Benefits from Interest Rate Cuts
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Mortgage Rates Fall, Offering Relief to New Home Buyers
By Victoria Sterling, Pulitzer Prize-winning Chief Editor
new borrowers are finding a little more breathing room in their budgets as interest rates begin to fall. A typical first-time home buyer is now approximately $270 a month better off thanks to recent drops, according to BNZ chief economist Mike Jones.
in June, the average mortgage rate paid stood at 5.66%, a meaningful decrease from the peak of 6.39% earlier in the cycle. Jones anticipates this trend will continue, with the average rate potentially dropping to 5% by the end of the year.
To illustrate the impact, a new home buyer with a $575,000 mortgage would have faced monthly payments of $3593, or $829 a week, at a 6.39% rate. However, at the current rate of 5.66%, those payments decrease to $3323 a month, or $767 a week.
This shift in rates is also influencing borrower behavior.Jones notes that the period of everyone rushing to refix their mortgages with very short terms – in anticipation of further rate drops – has passed. In January, 44% of outstanding fixed-rate borrowings had terms of six months or less. By June, this figure had fallen to 36%.
Instead, there’s been a slight increase in borrowers opting for terms between six and twelve months, and a more substantial six percentage point increase in those choosing terms of one to two years. This suggests a more balanced approach to mortgage positioning.
Looking ahead, approximately $135 billion worth of mortgages are scheduled to be refixed over the next six months, representing 41% of all outstanding fixed-rate mortgage debt. Interestingly, Jones observes that borrowers aren’t always solely focused on securing the absolute cheapest rate.
“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,” he explained. This is evidenced by the earlier trend of shortening borrowing terms,even when short-term rates were higher,proving to be a prescient move as rates subsequently fell. Now, even as longer-term rates are slightly higher, borrowers are beginning to extend their terms.
Jones predicts the official cash rate will eventually drop to 2.5%. “We are edging into the final stretch of this easing cycle,” he stated,adding that the shift in borrower behavior is consistent with this expectation. He doesn’t anticipate a rush for longer-term fixes, suggesting a cautious approach as the Reserve Bank navigates the final stages of the rate cuts.