When will homeowners see savings from interest rate cuts?

Tuesday, 23 July 2024

Kiwibank calls the Reserve Bank's statement dovish, predicting a rate cut by November. With a softened tone and faster inflation fall projections, Kiwibank remains confident in a 2023 rate cut, which is good news for households and businesses.

New Zealand’s major banks announced interest rate cuts last week, but homeowners will have to wait to see significant savings.

According to some industry players, cash-strapped mortgage holders and new homebuyers will likely see the benefits in the coming year — but these might be much smaller than expected.

“The economy has softened, inflation is returning to the central bank’s target at a faster rate than expected,” Kiwibank chief economist Jarrod Kerr said.

Kerr said the announcements from major banks were “a step in the right direction”.

He said Kiwis have been fixing their mortgages for shorter periods, with Reserve Bank Te Pūtea Matua (RBNZ) data showing that 70% of outstanding mortgages are fixed for less than a year while 20% are fixed for less than two years.

“That 70% will feel it relatively quickly and 90% of people will feel rate cuts in next year and a bit, which is great,” Kerr said.

“Only 10% of people are on floating rates. They will have to roll off these to see the benefit of lower interest rates,” Kerr said adding that, “that is happening faster than normal.”

The RBNZ kept the OCR at 5.5% this month.

Rate cuts are a positive move, particularly for the psychological impact on mortgage holders, he said.

“Knowing interest rates have peaked and are starting to fall will cause people to have a sigh of relief,” he said.

“They’ll be eagerly anticipating their [interest] rate rolling to lower levels.”

But he said the change was not matched by the RBNZ.

He said the central bank needs to cut the official cash rate (OCR) soon so that major banks can pass on more savings to mortgage holders.

Kiwibank chief economist Jarrod Kerr says mortgage-holders will be relieved at recent bank moves.

Kerr predicted the RBNZ will slash the OCR in November.

But mortgage advisor Mike Whittaker said the falling rates were not making a huge material difference to borrowers yet.

He said new homebuyers are likely to see better benefits while current homeowners are seeing marginal differences.

“Interest rates for one year fixed term loans were announced to have gone down to 6.85%, but we have been getting that rate for the last three months,” Whittaker said.

He said a $500,000 mortgage fixed at 6.85% interest for a year costs a homeowner $3276 per month.

The newly announced 6.75% rate will cost $3242 a month, which adds up to less than $10 a week in savings.

“It makes a little difference to Kiwis but not significantly.”

Whittaker said, however, that homeowners fixing their interest rates in the next month will end up with lower payments: “That’s good news”.

“If you’re buying a house, you will end up with lower mortgage payments,” he said.

The OCR will likely make a bigger difference to homeowners, Whittaker said.

“The OCR went up fast, so it has to come down fast.”

The RBNZ kept the OCR at 5.5% this month.

ASB chief economist Nick Tuffley said: “We are hitting the point where the RBNZ’s worries should switch from the risks from cutting the OCR too soon to the risks of keeping it too high for too long.”

“It is time for the RBNZ to seriously consider cutting the OCR in our view,” Tuffley said.