ANALYSIS: Interest rates have fallen further and faster than many economists predicted this year. Back in June, I surveyed a few of my peers to get a sense of how far the one-year mortgage interest rate might fall. The consensus was that the one-year rate would sit at around 7% through to December. Yet, sitting here today, the one-year rate is closer to 5.8%.
The shift in rates since the Reserve Bank cut the Official Cash Rate in August, and subsequently again in October and November, has been dramatic but in recent weeks there have been changes taking place behind the scenes at the major banks that will have just as big an impact.
1) The banks have put the brakes on “secret" discounts
It’s common knowledge among mortgage brokers and others in the business that banks sometimes offer customers lower rates than the ones they are publicly advertising.
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In October, just before the Reserve Bank dropped the OCR to 4.75%, ANZ dropped its one-year mortgage rate to 5.59%, below its advertised rate. The cut to the bank’s discretionary non-advertised rate was offered to both existing and new customers who had at least 20% equity.
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The size of the discounts the banks have been offering has varied over the course of the year, but as today, they have largely disappeared from the market. Only the six-month rate is being offered by the banks with a significant discount - dropping from around 6.16% to 5.99%. Most of the other deals available to customers hover around the 0.05% mark.
The banks have also brought their discounting out into the open. Any special deals on rates are now advertised to the public. This is because the banks’ borrowing costs are stabilising. When the banks borrowing costs were falling, it made more sense for banks to discount. They wouldn’t want to drop their rates, only to increase them a month later if the market changed and their borrowing costs got expensive again.
2) Some mortgage rates are increasing
The shorter-term rates are still falling, but the pace of interest rate declines has slowed. The average "secret" six-month rate is down 0.4% on last month while the two-year rate has dropped 0.12% since October. These are still large falls, to be sure, but rates aren’t falling as fast as they did a few months ago.
Interestingly, the banks increased their four-year and five-year rates in November, with the average "secret" five-year rate up 0.13%.
So, while interest rates are generally coming down, that doesn’t apply to every rate.
This cements my view that the longer-term rates won’t drop much over the next year. I reckon that only the shorter-term rates will see any real cuts. And those cuts won’t be as large as we’ve seen in 2024.
Any interest rate relief is welcome, but the 1.5% drop in the one-year rate we enjoyed this year probably won’t be repeated in 2025.
3) The banks are loosening their purse strings
You might pay a 5.8% interest rate when you apply for a mortgage, but the bank will test your ability to repay at a much higher rate. This is called the servicing test rate and banks use it to make sure you can service your debt if interest rates rise.
BNZ tested mortgage applications at 9% at the start of the year but today is testing applicants at 7.5%. That drop of 1.5% makes it easier to borrow. All else being equal, you can borrow more than at the start of the year.
BNZ isn’t the only one loosening the purse strings. All the major banks have dropped their servicing test rates by more than 1% since the start of the year.
This means first-home buyers allowed a $500,000 mortgage at the start of the year can now access $575,000.
4) But mortgage brokers say it’s getting harder to get money from the banks
A net 17% of mortgage brokers say the banks are more willing to lend than the previous month. That’s according to Tony Alexander’s survey of Mortgage Brokers, sponsored by Mortgages.co.nz.
This reading has fallen over the last few months. Sure, more mortgage brokers say it’s getting easier to borrow. But a few more say it’s getting a little tougher. At least compared to last month.
One of the reasons for this is that banks are busy. Lots of people are looking for money, so the lending teams are doing it tough in the lead-up to Christmas.
In a tough market, some mortgage brokers will submit borderline mortgage applications, which clogs up the queue for everyone.
- Ed McKnight is the economist at property investment company Opes Partners
