Yes, lower interest rates are easing mortgage stress

Thursday, 6 November 2025

Lower interest rates are helping with debt servicing for residential and commercial mortgage borrowers.

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Lower interest rates are easing debt-servicing pressures for mortgage borrowers, even though risks to the country’s financial system are higher than in recent years, the Reserve Bank says.

Fragmentation of global trade and finance, and ongoing policy uncertainty continued to present risks, it explained in its latest financial stability report, released on Wednesday.

Reserve Bank Governor Christian Hawkesby said under-performance in parts of the New Zealand economy, such as retail and hospitality, was creating challenging conditions for households and businesses.

“Loan defaults have picked up, although they remain low compared to during the Global Financial Crisis. Lower interest rates and high commodity prices are supporting some sectors, including agriculture.”

But monetary policy easing continued to transmit through the economy, and lower debt-servicing costs were alleviating stress in some areas, the report said.

The finance minister said the drop in the OCR to 2.5% would flow through to lower interest rates for mortgage holders.

“Mortgage borrowers continue to shift from relatively high floating rates to lower fixed rates, as expectations increase that the OCR is nearing its trough in the current cycle.

“Lenders are competing more aggressively for borrowers. Banks have continued to reduce their serviceability test rates for new borrowers as mortgage rates have declined.”

As debt-servicing costs had fallen, household stress had started to decline, and fewer borrowers were now falling behind on debt repayments, it said.

“Banks expect non-performing loans to continue to decrease over the next year, supported by improved borrower cash flows. Instances of mortgagee sales remain low.”

The report also found that commercial property borrowers had benefited from lower interest rates, and the share of them assessed as potentially stressed or non-performing had fallen.

But increasing vacancy rates remained a risk, and credit demand from commercial property borrowers remained sluggish, particularly for development lending, it said.

“Protracted soft conditions in the housing market have challenged the construction industry, and residential building activity remains subdued.

“Established developers are in a relatively strong financial position, with high equity positions that reduce their vulnerability to cash flow stress, but prolonged weak demand for new builds could put further pressure on more indebted developers.”

Mortgage repayment stress appears to have peaked at low levels, Cotality’s Kelvin Davidson says.

Housing market activity had picked up from its low point in 2023, although house prices remained flat and low levels of net migration and a soft labour market continued to restrain housing demand, it noted.

Meanwhile, new mortgage lending analysis from property insights company Cotality found that repayment stress appeared to have peaked at low levels.

The share of non-performing loans – those more than 90 days overdue or already impaired – has edged down to 0.6%, after peaking at 0.7% earlier this year, it found.

Cotality chief property economist Kelvin Davidson said that was well below the levels seen during the Global Financial Crisis, when the rate was roughly double.

“Banks have also begun trimming their bad debt provisions, suggesting confidence that the worst of the stress cycle may be behind us.”

Many borrowers were still set to benefit from lower rates, with about 12% of existing home loans currently on floating rates, and a further 33% fixed but due to reprice by March, he said.

“While some of these borrowers are already on competitive rates, many are likely to see a meaningful reduction in repayments as they roll onto lower rates.

“It’s a shift that’s steadily feeding through to household budgets and the broader housing market.”

New mortgage lending was gaining momentum, Davidson added.

“Activity across house purchases, loan top-ups and bank switching (or refinancing) has increased year-on-year in 24 of the past 26 months, highlighting a sustained uplift in borrower confidence and market engagement.”

Interest rates have been getting lower since the Reserve Bank started cutting the official cash rate in August 2024. In October it slashed the OCR by 50 basis points to 2.5%, and most economists expect at least one further cut to come.