Mortgage rates could drop further with negative OCR next year

by Ksenia Stepanova28 Oct 2020

Mortgage rates are likely to stay “extremely low” over the next several years according to ASB economists, who say that fixing and then rolling shorter-term rates is likely to be the cheapest borrowing option over the next five years.

Senior economist Chris Tennent-Brown says that borrowers have the chance of locking in record low interest rates now, with ASB’s own fixed-term rates starting from 2.49%. However, he says borrowers should still always plan to deal with higher interest rate costs further down the line, rather than relying on rates remaining this low indefinitely.

He noted that rates had been expected to slowly pick back up at the beginning of the year, but COVID-19 shifted that view dramatically.

Read more: Westpac economists remain adamant in negative OCR forecast

“The outlook for the economy, and in turn interest rates changed over February and March as the coronavirus turned into a global pandemic,” Tennent-Brown said.

“In March, the RBNZ and other central banks slashed their respective policy rates to record low levels and instigated other support measures to provide liquidity and drive long-term yields lower. Mortgage interest rates have dropped significantly in the wake of the RBNZ’s actions.”

“Furthermore, the RBNZ has (temporarily) removed the loan-to-value ratio (LVR) restrictions that were impacting borrowers and borrowing costs,” he added.

“And more recently, ASB has simplified things for borrowers by offering only one table of carded rates, rather than two tiers (for high and low LVR loans), as had become the norm in the LVR era.

“We expect the RBNZ to maintain downward pressure on mortgage rates over the year ahead, by cutting the OCR into negative territory and introducing other policies to lower borrowing costs.”

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Tennent-Brown says his forecasts for even lower rates depend on the Reserve Bank cutting the OCR to -0.5% early next year and introducing a bank funding facility, which would result in term deposits and wholesale and mortgage rates all declining.

“Our forecasts suggest that some fixed term mortgage interest rates could dip below 2% over the year ahead, and all fixed terms should stay below current levels for the next two or three years,” he stated.

“Floating mortgage interest rates are also forecast to decline but will remain significantly higher than fixed-term mortgage interest rates for most tenors. With the relative expense of floating in mind, you always need to do some careful calculations if you think it’s worth floating in order to time the right moment to fix.”

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