How much mortgage re-fixing relief is still to come?

2026-02-02 - 16:09

The ongoing repricing of maturing fixed-rate mortgage borrowings onto lower rates is an important plank of the economic recovery. Given this, we’ve had a quick look into how much juice might be left in the re-fixing trend. It’s timely to do so given recent changes in the interest rate outlook. Mortgage rate outlook pivots upwards The Reserve Bank’s November meeting heralded the end of the interest rate downtrend, and data released since has validated that shift. Alongside brighter activity numbers, there’s now a little less breathing room on inflation, as confirmed by the Q4 Consumers Price Index. We’ve consequently pulled forward our forecast start to the Reserve Bank’s tightening cycle. We now see the first hike coming in September. Mortgage rates are starting to rise, but the average rate being paid is still falling as re-fixing continues, with our estimates showing the average mortgage yield dropping from above 5 percent to around 4.85 percent by mid-year — suggesting we’re about 80 percent through the ‘great mortgage repricing’ onto lower fixed rates.Mortgage rates have nudged up a little further so far this year, following the 20-30 basis points bump in longer term rates in December. We think the bias remains upward given the shifting risks around the Reserve Bank’s OCR cycle have returned wholesale interest rates to December’s highs. A busy six months for repricing We termed 2025 the ‘year of the re-fix’ with 81 percent of fixed rate mortgage borrowings repricing – a 13-year high. For the coming 12 months, the run rate slows but is still above average with 68 percent of fixed rate loans due to reprice. For all borrowings, i.e. including floating, it’s 72 percent. Of this, the chart shows that it’s the coming six months in which mortgage term expiries are most pronounced relative to average. There’s approximately $132b worth, or 34 percent of total borrowings. The long-run average is 27 percent. Most borrowers soon to experience a mortgage rate reset will face a menu of rates more favourable than previously. Advertised rates can obviously move, but the current mortgage curve is around the lowest in recent history (chart below). A quick example illustrates the potential cash flow relief. A hypothetical one-year $300,000 loan locked in a year ago at 5.74 percent could currently be re-fixed for another 12 months at a rate of around 4.5 percent. That would result in an interest saving of a little over $300 a month. There are a range of areas in which mortgaged households might apply the windfall. There does appear to be a trend toward additional principal repayment as mortgage rates have come down. Some of the extra cash flow will also inevitably be soaked up by the additional costs facing households. But at least some of the rate relief will be spent. We’ve seen evidence of such in the slow reflation of retail spending appetites over the second half of 2025. This trend should continue. Rate relief writ large For an economy-wide guide on the pace and impact of mortgage repricing, the Reserve Bank produces data on the yield on residential mortgage loans. Think of it as a proxy for the average mortgage rate being paid. As of November, this average paid rate was 5.17 percent. It’s been a slow, 14-month descent from the 6.39 percent peak in October 2024. That it’s been a grind reflects the usual gradual resetting of the fixed rate mortgages that dominate NZ mortgage borrowing (85 percent of the total). But also, and more so this cycle, occasional bouts of demand for floating exposure, at the higher rates involved, as borrowers have sought to position for continued declines in interest rates. We saw one such bout in the latest month we have data for – November 2025. A full 49 percent of new mortgage lending during the month was on floating terms, a record high for the admittedly short time series. But rather than signalling a change of intent, we think this was temporary, related to positioning ahead of the November OCR cut. Moving into December, and the sudden spike up in wholesale rates, all of the anecdote was about strong interest to term out mortgage borrowings. We’ll find out for sure when the December data is released next week. Producing a reliable estimate for how much further the average paid mortgage rate will fall can be fiddly. The results are sensitive, most obviously, to where mortgage rates go from here and changes in borrowers’ preferences for mortgage terms. Based on our interest rate projections, we estimate the average mortgage yield will keep falling until around the middle of the year, bottoming out about 4.85 percent (chart below). That’s a slightly smaller fall compared to what we had prior to the shift in the interest rate outlook. In short, the process of mortgage borrowers re-fixing onto lower rates is roughly 80 percent complete. There’s another 25 basis points or so of easing coming down the re-fixing pipeline, spread over the first half. The implication is that the cash flow release from mortgage repricing will remain a support for the economic recovery, albeit a dissipating one. It’s nonetheless important to remember that a slowing pace of cash flow changes doesn’t disavow the assistance from a sustained lower level of mortgage rates. We’ve also concentrated on just one angle here. The so-called ‘cash flow channel’ is one of several ways the Reserve Bank’s interest rate policy impacts the economy. The Bank put this up in lights last year, highlighting that some of the other channels – the exchange rate, wealth effects, and incentives on savings and investment behaviour – may in fact play more important roles. All told, and even with our earlier forecast OCR hikes, monetary policy looks set to remain stimulatory for all of 2026. Disclaimer: This publication has been produced by Bank of New Zealand (BNZ). This publication accurately reflects the personal views of the author about the subject matters discussed, and is based upon sources reasonably believed to be reliable and accurate. The views of the author do not necessarily reflect the views of BNZ. No part of the compensation of the author was, is, or will be, directly or indirectly, related to any specific recommendations or views expressed. The information in this publication is solely for information purposes and is not intended to be financial advice. If you need help, please contact BNZ or your financial adviser. Any statements as to past performance do not represent future performance, and no statements as to future matters are guaranteed to be accurate or reliable. To the maximum extent permissible by law, neither BNZ nor any person involved in this publication accepts any liability for any loss or damage whatsoever which may directly or indirectly result from any, opinion, information, representation or omission, whether negligent or otherwise, contained in this publication.