Borrowers gravitating towards shorter fixed-rate terms and floating rates

Borrowers in 2025 are likely to be torn about whether to fix their loans – and, if so, for how long – according to a leading market analyst.

CoreLogic Chief Economist Kelvin Davidson said that before the Reserve Bank of New Zealand started reducing the official cash rate, borrowers had been more likely to fix, and for longer terms. However, as interest rates had started falling, borrowers had become more attracted to shorter fixed terms or even floating rates. 

“On the latest data, only 10% of new loans were fixed for longer than 12 months, whereas only a year ago that figure was right up at 51%. On the flipside, the share of new loans on floating rates has risen from around 17% a year ago to 28% now. This can all be seen in the stock measure of loans too (i.e. covering existing mortgages), with the share of debt on floating rates recently having lifted fairly sharply to 14%, the highest level since late 2020,” he said. 

“This focus on shorter terms makes sense as mortgage rates fall and borrowers try to ride that wave down as quickly as they can, rather than fixing for longer and having to pay too much for a period of time until they can reprice again. But this also hints at what could perhaps be the most intriguing aspect of the mortgage market in the year ahead: at which point do borrowers again deem there to be good value in the long-term rates and potentially start shifting to those loans? 

“The answer to that will be a decision for each borrower to make, but there is certainly a sense that most of the Reserve Bank’s eventual full monetary policy easing (and other global factors) has already been factored in to some current mortgage rates – or in other words, those longer-term rates might not fall much further.”

Mortgage market remains in flux

Meanwhile, Mr Davidson said mortgage borrowing volumes – which had been increasing for more than one year – would continue rising in 2025. So too would property buying volumes, he added.

Right now, despite budgetary pressures, there hadn't been a noticeable increase in pessimism among borrowers, Mr Davidson said, given that the share of borrowers choosing an interest-only structure had remained quite stable over the past two years. But nor were borrowers particularly optimistic, given that the appetite for loans with a high loan-to-value ratio was “muted”.

“Where mortgage rates head and how borrowers react to that will also be a key theme to keep an eye on, alongside the DTI [debt-to-income] caps – they don’t seem likely to suddenly lock out vast swathes of borrowers in 2025, but it wouldn’t be a surprise to see DTIs at least become a much more common part of the general discussion around lending quite soon.”

Contact me for expert mortgage advice

In this kind of environment, it’s important to consult a mortgage adviser before making any major decisions around borrowing and refinancing.

I can give you expert advice about the state of the market and model different repayment scenarios for you, so you can make an informed decision about how to proceed.