Fair question. And honestly, it deserves a proper answer.
The numbers tell one story
Let’s start with the facts. Interest rates have fallen substantially, with the Reserve Bank cutting the OCR on multiple occasions throughout 2024 and into 2025. We’re talking about a massive reduction from the peaks we saw in 2023. That’s significant.
For someone refixing their mortgage right now, the savings can be substantial. If you’re coming off a rate that was fixed at 7% and you’re now locking in something in the high 4% range, you’re going to see a noticeable difference in your mortgage payments.
But interest rate changes don’t work like flicking a light switch.
The oil tanker analogy
Think of the economy like an oil tanker. You can spin the steering wheel 360 degrees, but that ship is still going to take a long time to turn. That’s essentially how monetary policy works.
Interest rates take a long time to fully impact inflation in the economy. When the Reserve Bank cuts today, the real effect doesn’t show up for 12 to 18 months. Sometimes even longer.
So, if the reduction cycle started around August last year, we’re only just now beginning to see the accumulated effects of those changes.
Why the delay?
There are a few reasons why you might not be feeling flush with cash just yet, even though rates have been dropping steadily:
- Your loan hasn’t been refixed yet: This is the big one. The interest rate didn’t drop 2.5% on day one. It’s dropped gradually over time. And if you fixed your mortgage for two or three years back when rates were at their peak, you’re still locked into that higher rate until your term ends.
- The relief comes in waves: Because most of us split our loans across different terms, we don’t get all the interest rate relief at once. You might get a chunk of savings when one portion refixes, then more savings six months later when another portion comes due. It’s a little bit now, a little bit later.
- Rising costs are eating into the savings: Even as your mortgage payment drops, insurance premiums have gone up, power bills have increased and groceries cost more. So while there might technically be more money in your bank account from lower mortgage payments, it’s being absorbed by increased costs elsewhere.
- The job security factor: Even when people do have extra money in their pockets from lower interest rates, they’re not always spending it. Why? Job security concerns. Throughout this year, people have been worried about losing their jobs. When you’re uncertain about your employment, you don’t rush out to spend any extra cash you’ve got. You save it. You build a buffer. Even though the interest rate relief is coming through, we’re not seeing it translate into increased spending across the economy yet.
When will things improve?
The good news is that we’re at a turning point. All the conditions are aligning for things to start moving in the right direction.
As we head into 2026 and more mortgages refix at lower rates, money will be freed up in household budgets. By mid-2026, being paid across all terms will be in the low 5% as things bottom out.
And as job security concerns ease (unemployment figures are starting to stabilise), people will feel more confident about spending that extra money. That’s when you’ll see the real economic effect kick in.
What this means for borrowing capacity
For anyone looking to buy property or upgrade their house, this becomes interesting.
At the start of this year, I’d run the numbers for clients wanting to buy or upgrade, and I’d tell them they could borrow, say, $600,000. Often, that wasn’t enough for what they wanted to do.
But as interest rates have fallen, so has the stress test rate that banks use to assess your borrowing capacity. That same client might now be able to borrow $725,000, with the same income and expenses.
That difference – that extra $100,000 in borrowing power – can be the difference between red and green, between no and yes, between staying put and making your move.
The Reserve Bank’s balancing act
The Reserve Bank is expected to be cautious about implementing further OCR reductions, as they’re aware of the momentum building in the economy. They learned a hard lesson after Covid when they reduced rates too far, too fast.
Everyone went mad spending, which created massive inflation. That’s what happens when the levee breaks. And then to plug that gap, interest rates had to shoot up dramatically, which hurt a lot of people.
The new Reserve Bank Governor will have to strike a delicate balance. She’ll be dealing with potential inflation pressures as the economy picks up, but she can’t squash things too hard, or we’re back to boom and bust all over again.
The bottom line
Yes, interest rates have fallen significantly. But if you’re not feeling it in your wallet just yet, you’re not imagining things.
The lag is normal. It’s how monetary policy works. The oil tanker is turning, but it takes time and distance for that turn to complete.
The key is understanding that the relief is coming. For many people, it’s already here. For others, it’s just around the corner when their mortgage comes up for refixing.
That’s just how the cycle works.
Feeling confused about where you sit? Or wondering if now’s the right time to make your move? Get in touch. We can run the numbers and show you exactly what your borrowing capacity looks like with today’s rates – and what it might look like in six months’ time.