How low could mortgage rates go?

With the Reserve Bank poised to offer more support to the economy, ASB economists predict home loan rates will plummet further into the new year.

Wednesday, October 28th 2020, 1:56PM

Weak inflation numbers last week have given economists greater confidence that the Reserve Bank will push forward with further measures to prop up the economy.

The bank's Funding for Lending Programme, designed to provide cheaper funding for banks, and a negative official cash rate have been tipped as the next moves the central bank will make.

In their latest home loan rate report, ASB economist Chris Tennent-Brown predicts mortgages will drop below 2% in the year ahead.

If the RBNZ slashes the OCR to -0.5%, as predicted, Tennent-Brown suggests there will be significant downward pressure on home loan rates.

"Our forecasts suggest that some fixed term mortgage interest rates could dip below 2% over the year ahead, and all fixed terms should stay below current levels for the next two or three years," he said.

"Floating mortgage interest rates are also forecast to decline but will remain significantly higher than fixed-term mortgage interest rates for most tenors."

It comes as mortgage rates continue to fall in recent weeks, in anticipation of further Reserve Bank action. Westpac and ANZ's one year rates have been slashed to 2.49% in the past week.

While some borrowers may be tempted to switch to a lower rate and break their existing term, the bank warned customers to expect large break fees. Tennent-Brown said it might be the right option for some customers.

"There isn’t a shortcut to lower mortgage interest rates without incurring a break cost. But breaking a mortgage and resetting at a lower rate can still be a reasonable strategy for getting interest rate certainty for a longer term at low rates."

For the latest mortgage rates, check out TMM Online's rates table.

Tags: ASB Lending Mortgage Rates OCR forecasts