Following the Reserve Bank of New Zealand’s (RBNZ) recent decision to lower the Official Cash Rate (OCR), many homeowners are wondering just how low interest rates could go. With further OCR reductions predicted this year, it’s an ideal time to consider whether refinancing your home loan could save you money. Find out which way interest rates are headed and what could potentially stop them from dropping any further.

What the OCR decision means for homeowners

Over the past few years, mortgage rates have risen sharply as the RBNZ steadily increased the OCR from 0.25% in November 2021 to 5.50% by May 2023. The rate hikes were a response to rising inflation and a hot property market, causing mortgage rates to soar and making home loans more expensive for many.

In August 2021, the average one-year fixed rate for homeowners was around 2.58%. Three years later and that figure had climbed to 6.97%. Fortunately, this trend looks to be reversing, and in August 2024, the OCR dropped to 5.25%, with indications that it could drop even further over the coming months.

Provided inflation remains in check, we could see more rate cuts in 2024, with some economists predicting the OCR will be down to 3.75% by the end of next year. For homeowners considering refinancing, this could be a chance to lock in lower mortgage rates and reduce monthly repayments.

What could stop interest rates falling

While the outlook for lower interest rates looks promising, a few factors could put the brakes on further reductions. One of the key concerns is inflation. The RBNZ is required to keep inflation between 1 and 3% on average, and any sign of inflation rising again could slow or even reverse rate cuts.

A surge in consumer spending or a resurgence in property market activity could impact the RBNZ’s decisions. During the pandemic, the property market experienced a significant increase in demand, particularly from investors, which drove up property prices and led to "fear of missing out" (FOMO) amongst buyers. Signs of a similar pattern emerging could cause the RBNZ to reconsider or delay any further cuts.

Upcoming inflation reports will play a critical role in the RBNZ’s decisions, with the next major indicator being the Consumer Price Index report for the September quarter, due for release in mid-October.

Refinancing to save money

With interest rates trending downwards, refinancing your home loan could potentially save you thousands of dollars over the life of your mortgage. But it’s not a decision to be made lightly. Here are some things to consider before making a move:

• Interest rates: Locking in a lower fixed rate would provide you with stability and predictability, provided you plan to stay in your current home. A variable rate would give you more flexibility, if your plans are likely to change.
• Loan terms: Reducing the length of your loan term allows you to pay off your mortgage faster and save on interest over the life of the loan. Extending your loan term will lower your monthly repayments but increase the amount of interest you pay in the long run.
• Costs of refinancing: Before refinancing, weigh up all costs of switching loans – such as early repayment or break fees – against any potential savings.

Get expert advice before refinancing

Deciding whether to refinance your home loan can be complex, especially when interest rates are fluctuating. Working with an experienced mortgage adviser can help you navigate this process and ensure you make the best financial decision for your situation.

If you’re ready to explore whether refinancing is right for you, contact Mortgage Express today to connect with a mortgage adviser near you.