Current Outlook for 2025

2024 finished with the hope of continued decreases in home loan interest rates in the new year.

Now that we are into 2025, are we as hopeful?

I think a slightly nuanced “yes” would be my response.

At the time of writing (23/1/25), the advertised discounted rates of many banks have dropped to 5.99% for 6 months and 5.59% for 1 year. However, note that these rates have been individually offered to many of my clients for a couple of months now.

How Bank Rates Work

Here is how this works:

• Banks have standard rates that they advertise.
• They then have discounted rates that they advertise with “criteria applying” (those criteria are generally around certain loan-to-value ratios and if you are a main bank client). Most home loan customers will receive these rates.
• Banks will generally then offer even further discounts if you ask, either directly, through us (your friendly mortgage adviser), or through your online banking.

What then occurs is the spread between the advertised discounted rates and further discounted rates increases until the advertised discounted rates eventually drop—and the further discounts disappear for a period. If the banks' cost of funds continues to decrease (lowering wholesale rates or dropping deposit rates), they will then start to offer further discounts for a period, until they drop their advertised discounted rates.

We are in the week where banks are dropping their advertised discounted rates, so we are getting almost no further discounts. That is the long way of saying that although banks have advertised interest rate drops this week, we are still getting the same rates for our clients.

What Happens from Here

1. Global Economic Factors: The world is holding its collective breath to see how US politics will affect the rest of the world. Limiting this to economic questions: Will Trump be able to “order down” inflation in the US? (That will help lower US and NZ interest rates.) Will tariffs occur, which could be inflationary in the US (interest rates go up), and would this put a handbrake on NZ exporters and so the NZ economy (encouraging rates to go down)? Let us just call that some “market uncertainty” for now!
2. Reserve Bank OCR Announcement: We do know that the next Reserve Bank Official Cash Rate (OCR) announcement is on the 19th of February. At the last announcement, the Reserve Bank was pretty explicit about signalling a further drop by 0.5% this time around. If that occurs, the floating interest rates will likely drop soon after by around 0.5%. The short-term fixed home loan rates will likely keep nudging down (but probably not by 0.5%). This has already started happening in anticipation (as per the above conversation) but will likely happen over weeks and in small amounts. Don’t expect a 0.5% drop to the 1-year rate the day after a 0.5% drop in the OCR.
3. Longer-Term Rates: We have watched longer-term rates (3–5-year fixed home loans) nudge up very slightly over the last few months.

What to Do?

‍Option 1:
Keep fixing “short” (i.e., for 6 months or 1 year). My personal feeling is this may be the option for 2025; HOWEVER, the risk is you lose your chance to fix in for longer before these longer rates have gone higher.

Option 2:
If rising longer-term rates are a concern, you could fix for longer (i.e., 3-5 years). Do recognize that the mainstream thinking is still leading to further rate decreases, so you may be locked into higher rates for longer.

Option 3:
You could hedge your bets and fix over a range of loan terms. You won’t “win” or “lose” as big, but your payments will be more stable over time.

Final Thoughts

When I am asked by clients what to do, I am finding it harder this year to be certain in my responses.

Of course, every client's situation is different, so a decision taking into account upcoming life changes, appetite for risk, and surplus funds is as key as predictions about interest rate movement.

All other things being equal, if pressed, I am still leaning towards fixing for shorter (1 year max) but with a BIG disclaimer around the risk of longer-term rate upward movement.

In times of uncertainty, I try to get as much information as I can, weigh up the options, decide, and then not dwell on it. So, my advice: get it done and go to the beach!

‍

Brendon.

Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see our disclosure statement on our website.

About Brendon:

Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice, I worked as a youth worker and managed teams for a not-for-profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts, I can be found running the trails of Wellington.

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