While the implications of Official Cash Rate (OCR) cuts vary depending on individual circumstances, most borrowers can agree that when it comes to mortgage interest rates, lower is better!
The OCR is a tool used by the Reserve Bank of New Zealand (RBNZ) to influence economic activity and inflation. When the OCR is high, borrowing becomes more expensive, and when it’s low, borrowing is generally more affordable. Mortgage interest rates, especially floating and short-term fixed rates, are closely linked to the OCR. The OCR has been steadily declining since August 2024, as inflationary pressures ease in New Zealand. RBNZ expects further reductions in the coming months, and many economists are forecasting a drop to 2.75-3% by December 2025.
If the OCR drops again, borrowing costs may continue to decline, meaning lower interest rates on new loans and potentially better re-fixing opportunities for those with expiring fixed term loans. However, banks are saying they’ve already “priced in” future OCR cuts (seen in current rates), so we’re not expecting huge reductions in mortgage interest rates in 2025.
With this in mind, lending rates are expected to either decrease slightly or remain stable. This creates an opportunity for borrowers to secure more favourable terms. If you have a mortgage or are planning to enter the property market, now is the time to assess your options and position yourself to take advantage of lower lending rates in 2025, compared to what we’ve seen in previous years. Here’s how you can prepare.
1. Review your mortgage structure
If you currently have a fixed term home loan, review your mortgage structure now. Check when your fixed term period expires and what your current interest rate is. If it’s set to expire soon, you should start exploring refixing or refinancing options. Further OCR cuts are predicted, so we encourage you to consider a shorter fixed term (e.g. 6 months to 1 year) to keep your options open for potential lower rates in the future. Consider splitting your loan across different fixed rate terms—this will reduce risk while helping you benefit from lower rates.
If you have a variable rate/floating home loan, you have more flexibility, allowing you to benefit from lower interest rates as soon as they become available. While interest rates are still on the higher side, consider making extra payments on your variable rate mortgage if you can afford it—we explore this more below.
2. Increase your repayments if you can afford to
While interest rates are still on the higher side, but on their way down, consider making extra repayments on your home loan if you can afford to. Even small additional payments can make a big difference in reducing the overall interest cost and shortening the life of your loan. If interest rates do end up falling by the end of this year or after, you’ll be in a stronger financial position with lower debt, giving you more flexibility to adjust your repayments, refinance, or take advantage of lower rates.
If you have a variable/floating rate loan, you can generally make extra payments whenever you like without incurring early repayment fees. If you have a fixed-term loan, you might be able to make an extra lump sum payment or increase your regular repayment amount. However, there may be limitations or fees for exceeding certain limits, so it’s important to understand the conditions of your loan.
If you’re unsure how much extra you can contribute, try using our online mortgage calculator or speak with someone in our lending team to explore options that fit your budget.
3. Refinance for better rates and terms
If you have a long-term fixed-rate mortgage that was set up before August 2024, you might find it beneficial to switch your mortgage to a different lender or restructure your loan with your current lender to take advantage of a lower interest rate or better loan terms. You might also choose to refinance or restructure your loan to access additional funds (e.g. for renovations), or for better flexibility.
However, break fees can apply if you end a fixed loan early. It’s best to weigh up the cost of breaking your current loan versus the potential savings from a lower rate.
4. Capitalise on lower interest rates and recovering house prices
Whether you’re a first time home-buyer or investor, lower interest rates allow you to take on more debt while keeping your repayments the same. But lower interest rates tend to push up house prices.
NZ is in a unique sweet spot where house prices remain significantly lower than their 2021 peak, while interest rates have started to decline. This rare combination of affordability and improved borrowing conditions makes now an excellent time to invest in property. The market hit its lowest point around May 2023 and has been recovering since, positioning buyers to benefit from potential long-term capital gains as values rise.
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While no one can predict the exact movements of interest rates, having a solid mortgage strategy in place ensures that you can adapt to changing economic conditions. Whether interest rates drop or remain unchanged, being proactive with your home loan decisions will help you manage costs effectively and secure the best possible outcome for your financial future.
If you need personalised advice on structuring your mortgage, speak with a Moneybox mortgage adviser who can guide you based on your individual circumstances.