When are interest rates going to drop?

Whenever I’m at a social occasion, I try to avoid talking about what I do because inevitably, I end up spending the rest of the evening listening to people’s opinions on Property and Interest Rates and politely indulging their questions.

I also run the risk of inadvertently dishing out some financial advice when I’m six beers in. Even worse, someone who is also six beers might just take that advice! So, I just try to keep quiet and talk about trout fishing.

It so happened that I was invited to a client’s housewarming party recently (a thoroughly excellent occasion in the end), and the question ‘What do you do for a job, Cam?’ was bloody hard to avoid. Especially as I was obviously not one of the usual suspects in this person’s home.

I’m a mortgage broker, I said quietly. And I waited for the questions.

What’s going to happen with interest rates? When will they go down? What’s Luxon doing about it? Kiwibank says rates are going down, but ANZ says they’re going up! What do we do Cam?

Rather than answer, my tactic was to volley questions back so that the ‘tiddly’ people could jabber to themselves about all that. If there’s one thing a bunch of Aucklanders love, it’s talking about property, interest rates and the ridiculous price of broccoli.

Meanwhile, I made a quiet retreat to the cheese board.

But it’s Monday morning, I’m back at the desk now, and those questions from the housewarming party about interest rates deserve an answer. So here goes.

When will interest rates fall?

The short answer is I don’t know.

What we do know is that the RBNZ has pushed very hard on the economic brakes to try to tame inflation, and it is working. We know it is working because the stats show inflation peaked in late 2023 (about September/October) and has been falling ever since. Interest rates peaked then, too, and have wobbled along in the high 6% range, and if inflation keeps tracking down, then at some point, most likely in 2025, rates will follow. Until that happens, rates will remain where they are.

In the meantime, people will analyse the financial tea leaves to the nth degree, and the media will pick up on it and end up writing stories that scare the bejesus out of us.

What should you do?

The advice 90% of clients get from us is to split your mortgage and have different fixed rates on each part because that spreads your risk. Talk to us first to make sure that’s suitable, but that’s where things will probably end up.

If you’ve employed that strategy, then I know you’ll have seen the benefit of it over the last three years.

Here’s some context to support that strategy: Before Christmas 2023, bank funding margins had widened, and this led to strong calls for the banks to stop being #@%! and reduce their rates.

What those people failed to realise was that the bank was passing that margin on to folk with term deposits and giving them a good return for the first time in decades. In other words, those commentators were only focusing on a part of the picture – the part that suited them best.

Then, last week (early Feb 2024), there was a big change in sentiment thanks to some crummy economic data out of the USA. That led to ANZ coming out and saying the RBNZ would push the OCR up in 2024. The media spread that across the motu and, like I said above, scared the bejesus out of us.

My point is that financial market movements are volatile, and the media exacerbate that, making it hard to know what to do.

The bigger picture is that rates will be lower in future; I think they’ll be noticeably lower about 18 months from now; that’s what the RBNZ is trying to engineer, after all. You have to bear in mind that the journey there will be volatile, and my ’18 month’ timeframe could well be wrong.

That’s why you’re better to focus on spreading your risk than timing your move. And frankly, all the rates are expensive irrespective of the term you want to fix for.

Have some of your mortgage set so that you can take advantage if things improve quickly. But also make sure you have some set so that if brighter days take longer to appear, then you have certainty for that part of the journey.

I find myself recommending a 12+18 month combo to people quite often these days.

Something else to consider.

If you’re thinking of buying or upgrading, then know it’ll probably never be more difficult to afford a mortgage than it is in 2024.

It also means that if you are capable (and we can help you find that out), then now is a good time to act because when things improve (as they will), you’ll face plenty of competition and the likelihood of rising prices. FOOP (fear of overpaying) will turn into FOMO (fear of missing out).

We’re happy to talk, so please reach out.

Now, back to that cheeseboard.