BNZ's chief economist says mortgage holders have shortened up the terms of their fixed-rate borrowing 'much more so' than before previous Official Cash Rate easing cycles

Kiwi mortgage holders have shortened up the terms of their fixed-rate borrowing much more than they have before previous Reserve Bank (RBNZ) interest rate easing cycles, according to BNZ's chief economist Mike Jones.

In his latest Eco-Pulse publication, Jones has had a detailed crunch of where mortgage holders stand with their fixed rate terms ahead of expected reductions in the Official Cash Rate (OCR) by the RBNZ.

He notes that with the position taken by many mortgage borrowers "interest rate relief will flow through to mortgage borrowers relatively faster than otherwise", as rates come down.

Since February, about three quarters of all new mortgage lending has been at terms of less than a year, Jones says.

"This preference for shorter terms means the overall mortgage book is now quite short. The fixed terms on about 64% of mortgage lending will reset over the coming 12 months (74% including floating borrowing). That’s well above the 51% average run-off rate going back to 2017."

And it is over the coming six months where the mortgage book is most short relative to average.

"About 36% of outstanding fixed rate borrowing will roll off over the coming six months. The post-2017 average is 24%," Jones says.

Comparing now with the start of previous Reserve Bank-led interest rate easing cycles shows that the mortgage holders are going shorter, earlier.

Jones says just prior to the easing cycle starting June 2008, the proportion of mortgage borrowings with remaining fixed terms of one year or less was around 48%. Just prior to the 2015 easing cycle kick-off it was 54%. In May of 2019 it was 67%.

"As noted earlier, it’s currently 74%. So it appears mortgage borrowers have shortened up the term of their borrowing in anticipation of the coming easing cycle much more so than prior to past cycles," Jones says.

The current approach of mortgage holders now has been all the more noteworthy "given the extra upfront cost involved in going short".

"Short-term mortgage rates have been above longer-term rates (an “inverted” mortgage curve) since mid-2023. Over this period, one-year fixed rates, for example, have been an average of 50-60bps [basis points] higher than three and five-year rates."

Jones says there is "two-sided risk" to the going-short strategy.

"And the proof of whether it proves to be the right one will be in the pudding, and we’re not there yet, but the apparent break from the ‘pick the lowest rate’ past looks more like strategic risk management."

The BNZ economists' current assumption is that the RBNZ will start cutting the OCR in November of this year and move in steady 25bps increments, taking the OCR from 5.50% currently to 3.50% by the end of 2025.

"We describe this as an 'assumption' rather than a forecast as it will almost certainly be wrong. For example, it is quite conceivable that the Reserve Bank will stop to pause and assess several times through the cycle, and there’s also the distinct possibility that a larger-than-25bps cut will be delivered at some point," Jones says.

He cautions that while mortgage borrowers may well be positioned for lower interest rates more so than past cycles, it’s still going to take a while for lower rates to flow through.

"The tanker takes a while to turn, just like we saw on the way up.

"The ‘effective mortgage rate’ – the average mortgage rate being paid on outstanding debt – is currently still rising. That’s despite mortgage rates having peaked around the start of the year. What’s more, and based on our interest rate forecasts and rough estimates, it’s got a little further to rise before flattening off around 6.5% towards the end of this year.

"It's another reason not to expect any immediate change in the fortunes of the presently weak NZ economy, even as interest rates start nudging lower. Most of the flow through effects will occur next year."