Photo: RNZ
Home loan rates are returning to levels not seen in a year - or sometimes more - but is it worth locking them in?
Banks have been cutting rates in earnest since the official cash rate (OCR) cut last week.
One-year rates at the main four banks range between 6.59 percent and 6.85 percent. Two-year rates run from 5.99 percent to 6.34 percent.
Westpac is offering 5.69 percent for a five-year fix, a rate not seen on average since early 2022, according to Reserve Bank data.
ASB's two-year rate offer of 5.99 percent is the lowest, as an average, for that term since the third quarter of 2022.
But with rates predicted to drop further - the Reserve Bank has forecast an OCR drop to 3 percent and some economists think it might need to fall still more - how long is it worth locking a rate in for?
ASB chief economist Nick Tuffley said there was "not a lot in it" in terms of which fix would offer the cheapest rate.
Historically, fixing for a series of one-year terms has often been the cheapest option, but that is not so clear at present.
"The two-year rate, where it is now, does offer pretty good value compared to the shorter terms. Not by a lot, but the trade-off is you're locking yourself in for two years."
To make fixing for one year at 6.59 percent and then refixing a better option than taking the 5.99 percent two-year rate, the one-year rate would have to have dropped to about 5.4 percent in a year's time.
He said if interest rates dropped aggressively in the short term, someone on a two-year fix would not benefit as quickly.
"At the moment [the choice of] six months versus two years is more around the value you place on flexibility, what's going to start to matter more."
He said there was not clear value in fixing for a longer term, such as three to five years.
"There's not a massive amount of difference in what the payoff is at different time horizons, but generally working out that at the margin it's out to that two-year mark that seems to offer the better value."
He said rates had a substantial amount of interest rate easing built into them already.
"Because wholesale markets have priced in pretty substantial rate cuts in the short term, you have got the interest rate curve factoring in a fair amount of easing already into to the longer term rates."
He said shorter terms would give buyers more options.
"One consideration also is we are basing our interest rate outlook on the cash rate getting down to 3.25 percent. If it ends up stabilising higher than that, longer-term rates at the moment may prove to be at the margin the better option. If the cash rate drops further than that or quite rapidly in the short term, shorter term more likely to benefit in the future from slightly lower rates at that point."
ASB's economists do not expect to see long-term rates drop as much as short-term rates do in the coming months.
"Ultimately it' s a trade-off between the cost of the mortgage rate, interest rate certainty for a longer period vs the flexibly of the other terms and the potential for rates to ease over the years ahead. Mortgage rates could dip lower than we expect, due to anything from Reserve Bank actions through to renewed threats to the economic outlook. However, rates could also hold up for longer than expected if inflation does not continue to cool as we are forecasting."
They said mortgage interest rates would settle higher than the recent Covid-19 lows.
"We suggest all borrowers pick a strategy that suits personal budgets including a tolerance for changing interest rates, and need for flexibility, as well as the goal of minimising interest rate costs."
