The OCR has fallen again - here’s what to do with your mortgage now

Thursday, 20 February 2025

Reserve Bank Governor Adrian Orr takes questions from reporter after announcing a 50 basis points cut in the OCR to 3.75%.

The Official Cash Rate fell 50 basis points on Wednesday to 3.75%.

Economists are picking a further cut by the end of the year.

Homeowners need to be realistic about where rates for one- to three-year terms will eventually bottom out, an expert says.

Advice to borrowers is changing as interest rates continue to fall and the Reserve Bank signals there could be even more cuts to come.

The central bank reduced the Official Cash Rate (OCR) by 50 basis points on Wednesday, taking the rate from 4.25% to a two-year low of 3.75%.

Reserve Bank Governor Adrian Orr said the country’s economic trajectory had been aided by a lack of major global shocks over the past 18 months and further cuts were possible.

Inflation was steadily declining and the economic outlook remained on track, with growth expected to continue through 2025.

“As we’ve said before, if economic conditions continue to evolve as projected, the committee has scope to lower the OCR even further in 2025,” he said.

Lloyd Burr explains why there's always a difference between the Official Cash Rate (OCR) and the mortgage rates banks charge us.

That was welcome news for economists, including Kiwibank’s Jarrod Kerr, who said the RBNZ’s track suggested a further drop to 3.14% by the end of the year, and to 3.1% by 2028.

“The really good news is that RBNZ has tamed the inflation beast and it’s time to drag the economy out of recession,” he said.

“With more interest rate cuts on the way, we see the economy recovering in 2025.”

The OCR cuts were quickly feeding through to mortgage rates, and 81% of borrowers were on terms fixed for less than a year, Kerr said.

Squirrel Mortgages founder John Bolton said people rolling off those terms needed to be realistic about where rates for one- to three-year terms would eventually bottom out.

Squirrel Mortgages founder John Bolton says borrowers should be looking to spread their risk.

“Nobody can predict the absolute bottom, but you have to keep in mind that a good rate in a normal world is 4% to 5%.

“People need to be careful not to anchor themselves with thinking that we might get to 2% or 3%, because that’s really not likely to happen. And when it did, it actually left us with a really nasty hangover where you had people coming off 2% and going on to 7%.”

Towards the end of last year, Bolton had advised borrowers to float or opt for terms of six months to a year when they re-fixed.

“Now we’re encouraging people to think about spreading their risk, fixing a chunk of their mortgage for two or three years and keeping the rest on a shorter term. It gives you a bit more flexibility, as well as the benefit of those rates around 5% which, to me, is pretty good.”

What could the different rates mean?

Mortgage calculators show a borrower repaying a $500,000 mortgage over 30 years would have weekly repayments of $681 per week on a six-month fixed term rate of 5.89%.

The same mortgage fixed for a year at 5.35% would require weekly payments of $642, while a two-year fixed rate of 5.29% would reduce repayments to $638 per week.

Fixing for three years at 5.59% would push repayments back up, to $659 per week.

CoreLogic chief property economist Kelvin Davidson said the terms borrowers chose when taking out a new loan or repricing an existing mortgage would be a key theme in the property market this year.

“Recently, the focus has been on floating rates or short-term fixes, but at some stage in 2025, that could switch back to an emphasis on longer-term rates, especially if global uncertainty stays elevated,” he said.

“All in all, 2025 could see a subdued upturn for the property market, with values nationally rising by around 5%.”