Interest rates are rising in 2026. Here’s a top economist’s view on where they’ll land

Wednesday, 31 December 2025

The low-interest rate party did not last as long as homeowners hoped it would.

Since the second week of December, major banks started raising longer-term fixed rates and it now seems likely we have more to come in 2026 and 2027.

This presents a major challenge to homeowners, who now have to decide how long they should lock in for once their rates roll over. The decisions they make will have major impact on the cost of their mortgage and also how quickly they can pay down the principal on their loans. Given the family home is often the biggest investment we hold, this will have major repercussions for our longer term wealth.

In one of his final notes of the year, Westpac chief economist Kelly Eckhold offered a forecast on where rates could end up and how quickly they’re likely to get there.

The Official Cash Rate (OCR) currently sits at 2.25%, but the wholesale market (which is what banks rely on to access money) is already pricing in OCR hikes from mid 2026.

Eckhold notes that the sweet spot for OCR was initially around 3-3.5%, but the Reserve Bank had to make deeper cuts due to global uncertainty and our sluggish economy.

This means we are currently in what bank economists call “stimulatory territory,” typified by interest rates having been lowered to the point of looking to kickstart the economy rather than just keep it steady.

This provides us access to cheaper money (lending at lower interest rates) and it disincentivises saving because term deposit rates are so low. The net effect is that people tend to spend and purchase more, which helps stimulate the economy but it also comes with the effect of pushing people to riskier investments (to get better returns) or taking on loans that are too large to manage when rates start to rise again.

That stimulation can go too far and eventually contribute to inflation, meaning all central banks dream of a longer-term neutral rate, which is neither speeding up nor slowing down the economy.

How high will we go?

For a sense of how high rates could go, you need look at what the Reserve Bank is likely to see as that neutral sweet spot where the economy is just being held steady.

Eckhold believes the neutral rate currently sits at around 3.75%, which means we can expect to see the Reserve Bank start moving in that direction (provided the economy does continue to track in the right direction).

In his forecast, Eckhold anticipates as many as six hikes, leading the OCR to hit 3.75% by the first half of 2028.

So what does this mean for your interest rates?

Eckhold says three of those hikes have already been priced in, which helps to explain why two-, three- and five-year fixed-term rates have all risen.

The shorter term and floating rates will only go up once the OCR hikes actually take place (likely starting halfway through 2026).

Once interest rates start climbing, we can also expect those fixed rates to go up as the market starts to price in further rates.

There are always many factors at play when it comes to interest rates, but the last time we had an OCR of 3.75%, borrowers with 20% equity could get a two-year fixed rate at about 5.29%.

Today, with current settings and an OCR at 2.25%, those same borrowers could secure a rate of 4.69%.

Previously, when I had spoken to Eckhold, he said we are currently in a higher for longer interest world, which means we are unlikely to return to the record low interest rates we saw previously.

“You've got to [question] if this is as low as it gets,” Eckhold previously told me.

“And if that's the case, then the benefits of [fixing your mortgage for] longer look more attractive.”

So much of this depends on your personal circumstances and whether or not being locked in for a longer term really meets your needs.

It’s also important to remember that circumstances can change relatively quickly. Global politics are currently highly unpredictable and a great deal can change in a short period of time.

A five-year rate might give you stability and certainty, but it comes at the expense of the flexibility to take advantage of lower rates should the OCR start falling. Being locked in a higher rate means that you’re paying more interest over years, stretching out the length of your mortgage. And putting more towards your mortgage for longer means you end up with less to put into retirement, which can leave your golden years over-reliant on proceeds from the family home or NZ Super.

The price of getting it wrong

Fixing for a longer term and then watching interest rates stay low or drop even further can also be a painful experience.

Much of this comes down to what behavioural economists refer to as the post-purchase rationalisation.

When we make a significant commitment, be it buying a new car or signing onto a mortgage, we often post-rationalise the decision and justify it to ourselves. You bought the car because it came at a great price for the safety features, or you signed onto the five-year mortgage because it was the best long-term option.

When we are then struck with information that runs counter to that, the perceived loss we are suffering can feel acutely painful. It can also become expensive to correct course.

A couple, given the pseudonyms Adeline and William, recently found that out the hard way when they took their case to the Banking Ombudsman after attempting to break a five-year fixed term they had signed with their bank in 2023.

For context, the average two-year mortgage rate dropped from around 7.5% in late 2023 to as low as 4.69% in 2025. At the same time, the average five-year rate has declined from 6.6% to 5.1%.

When Adeline and William approached their bank, they were told the break fee would cost approximately $45,000 to $50,000 – an amount that would add years onto their mortgage.

In her submission to the ombudsman, Adeline argued the bank should waive the fee, given she had been advised by a senior business adviser from the bank that interest rates were likely to rise again. Adeline complained that the bank misled and pressured her into refinancing the loan for five years, which led directly to her making the decision.

Ultimately, the Banking Ombudsman dismissed the complaint on account of there being no evidence of pressure or misleading conduct by the bank.

Despite putting up a fight, Adeline and William were therefore stuck between honouring the expensive five-year term or paying the $50,000 break fees.

If anything, this case serves as a reminder of the eyewatering penalties that often come with trying to break the terms of any financial agreement.

You need to always go into these things open-eyed and ensure that the prickly nag of post-purchase rationalisation doesn’t become too painful if circumstances do change.

No bank manager can say with any great certainty what might happen to interest rates in the longer term. There are simply too many variables at play to give an accurate assessment of what the market might look like in three to four years – which explains why we generally get such a long list of disclaimers when commencing a phone call with anyone from the bank.

Whether you pick a longer or shorter rate when refixing in the coming year will largely depend on your appetite for risk, your desire for certainty and your broader financial strategy.

Beyond that, interest rates will continue to do what they always do: sometimes they’ll go up and sometimes they’ll go down.