Mortgage rates tipped to fall below 5% in coming months

Thursday, 9 January 2025

Mortgage rates could drop below 5% soon, one expert predicts.

But others expect two-year rates to remain above 5% this year.

Borrowers previously hesitant to fix for more than six months are likely to shift to longer-term mortgages as interest rates stabilise.

Mortgage rates could fall below 5% in the next couple of months, even without changes to the official cash rate (OCR), one expert says.

However, others are more cautious.

The OCR is widely predicted to be cut 50 basis points in February, and by a further 50bp before the end of 2025. That would take the rate to 3.25% by the end of the year.

David Cunningham, chief executive of mortgage broking firm Squirrel, said even without OCR changes there was potential for mortgage rates to fall by about 0.5% in the next month or so.

That was because banks were still paying 5% for six-month term deposits versus a wholesale rate for six months of 3.8%, he said.

“I think those term deposits will drift down to 4.5%, enabling home loan rate cuts. Sub-5% is on the horizon.”

As of Thursday morning, with the OCR at 4.25%, the lowest advertised fixed rate from the five major banks was 5.49% for two years, offered by ASB and Westpac.

Westpac chief economist Kelly Eckhold said it was more likely two-year rates would plateau about there.

“Looking at our forecasts, I’d say it’s less likely they will go below 5%. With two-year rates, we would say mid-5.5%, perhaps slightly lower than that.”

While some short-term mortgage rates, including six-month and floating rates, should fall along with the OCR, Eckhold said longer-term rates wouldn’t be affected in the same way.

“Although we do expect further cuts in the OCR, long-term interest rates have already priced that in,” he said.

About half of all mortgages were up for repricing in the next six months, meaning even if the rates didn’t fall as far as Cunningham predicted, many borrowers could still benefit from any further reductions, Eckhold said.

“We expect the OCR to be at its trough by May and stay there for a while. After that, it’s more likely to go up than down.

“A lot of people have been hesitant about fixing for more than six months while rates have been falling.

“So what we’re likely to see early this year is more people migrating to one- to two-year rates as things level out.”

ASB senior economist Mark Smith shared a similar view, saying last month that the expected 100bp cuts to the OCR in 2025 should mean household borrowing rates in the range of 5% to 6% by the end of the year.

“The average interest rate on mortgage borrowing is assumed to end 2025 about 100bps lower than its 6.4% Q3 2024 peak,” he said