Expectation of Nov rate cuts prompts record short rate borrowing

Borrowers taking out mortgages for six months rose to a new high in May, in anticipation of interest rate cuts soon.

Wednesday, July 10th 2024, 10:19AM

Most banks now predict the Reserve Bank will start cutting the OCR from November as the economy continues to stall, unemployment rises and inflation falls back within the 1-3% band.

The latest RBNZ fixed rate term duration figures show the share of mortgages on six-month fixed terms borrowed by owner-occupiers rose to a new historical high of 17.1%, which equates to about one in six mortgages.

Compared to last year, when mortgages on six-month terms was at just 3.4%, this increase gives a sharp indication of borrowers’ thoughts on where they believe interest rate increases are going – down in the not too distant future.

The RBNZ is not predicting a drop until mid-next year, but the finance markets have a November cut already fully priced in, with a 50-50 chance of a cut in October.

Investor borrowing on six-month terms rose from 18.7% in April to 21.7% in May - about one in five mortgages.

While those figures hit historical highs, the one-year fixed term is the most popular for all borrowers. This term accounted for 36.5% of all new owner-occupier lending, but down from 39.4% in April.

It is the same story for investor borrowing, with one-year terms making up 40.2% of new lending, however that was down from 45% in April.

Overall total mortgage lending was $7.1 billion, up 18.5% from $6b in April and compared to the same month last year, up 22.8% from $5.8b.

The share of total new residential lending on fixed interest rate terms rose to 82.3%, up from 81.9% in April.

Owner-occupier lending increased to $5.2b in May, while investor mortgage lending rose to $1.8b.

On terms above 18-months, owner occupier lending was steady. For example, the share of two-year fixed mortgages rose to 8.8% from 8.6% in April, and the share of three-year fixed terms increased to 3.1% from 2.8%, while four-year fixed terms held steady and are at a historical low at 0.3%.

Owner occupier loans on floating terms are dropping, from 17.7% in April to 17.1% in May.

Investors’ share of 18-month terms increased from 8.9% in April to 11.9% in May, whereas two-year fixed terms declined from 7.8% to 5.9%.

Of the subcategories of commercial property lending, investment property dropped by $72 million (13.2%) to $473m.

Commercial property development rose by $86m (97.7%) to $174m, however, residential property development reported a 2% decline from $98m in April to $96m in May.

Tags: RBNZ