Could 2024 be a HAPPY NEW YEAR for home loan borrowers?

New Zealand mortgage rates could be heading south early in the new year if the swaps market is an indication. The key two- year swap rate — which has an influence on mortgage rates — has been heading sharply lower for the last couple of months.

This week, the rate went to 4.79 per cent — down by about one full percentage point from early October, with weak September quarter GDP data adding fuel to the trend.

While the two- year rate has come off sharply, mortgage rates — aside from some tinkering — have barely shifted. That means banks are currently enjoying a healthy net interest rate margin — the profit they make from the money they take in over funds they lend out.

“The base case is that it might be the second half of January that you could see banks begin to start lowering mortgage rates if we don’t see wholesale rates push up again,” Hamish Pepper, fixed income and currency strategist at Harbour Asset Management, said.

“That margin has expanded to being probably the largest over wholesale rates in around a year.”

Pepper estimates that the spread between bank funding costs, compared with one- year mortgage rates, was 135 basis points in November and has since expanded to 185 basis points, largely due to lower wholesale rates — the widest since July 2022 and about 40 basis points wider than the average.

Reserve Bank forecasts have its official cash rate — currently at 5.5 per cent — hitting 5.7 per cent by June next year but the market is not having a bar of it.

One mortgage broker said the bank’s published OCR track was “ridiculous”.

Overnight indexed swap ( OIS) pricing has 100 basis points of cuts factored in by the end of next year, with the first cut timed for May.

In the United States, a fracas looms between the Federal Reserve, which has set its Fed Funds rates at 5.25 and 5.50 per cent, and the market, which has taken a decidedly more optimistic view on the inflation outlook.

Its “dot plot” forecasts have signalled 75 basis points of cuts next year, but the market has doubled down on that, factoring in 150 basis points of cuts.

This week, the Financial Times reported that a top official at the Fed had warned financial markets have jumped “a little bit ahead” by pencilling in early interest rate cuts next year, in the latest attempt by the US central bank to rein in the exuberance that has driven up stocks and bonds globally.

Pepper said New Zealand wholesale rates are not the only part of the banks’ funding mix — retail deposit rates are the larger portion.

“But over time they have been fairly well behaved without really increasing, while wholesale rates have fallen over the last couple of months,” he said. “It’s really a question of how much they want to lend into the New Zealand market and, for now, it does not seem that there is a really strong appetite.”

There are three potential catalysts that could shift the market in the months ahead.

Firstly, there is the Consumers Price Index for the December quarter, due on January 24, which will be scanned for signs that inflation is indeed in retreat, as other secondary data has suggested.

The second is labour market data on February 7, which will be keenly watched for signs as to whether wage pressure has come out of the mix.

Thirdly, the Reserve Bank’s next monetary policy statement, due on February 28, will determine whether the central bank is sticking to its guns.

Pepper said mortgage rates have yet to fully reflect falls in wholesale rates.

This week, ANZ dropped its twoyear fixed- term mortgage rate by 20 basis points to 7.49 per cent and its three- year fixed term rate by 14 basis points to 7.35 per cent, while its special mortgage rates will see a 20 basis- point cut on the twoyear rate to 6.89 per cent

and 14 basis- point cut on its three- year rate to 6.75 per cent.

Last month, Westpac said its special two and three- year fixed home loan rates would drop 10 basis points to 6.99 per cent and 6.75 per cent respectively.

David Cunningham, chief executive of mortgage brokers Squirrel, expects to see “substantial falls” in mortgage rates by the end of January, adding the ANZ’s cut amounted to a “token gesture”.

“What should be happening is that term deposit rates and one- year fixed mortgage rates should be falling by half a per cent, approximately.

“There really is no reason why that should not happen straight away,” he said.

“And two and three- years should be falling by between half and one per cent.”

Cunningham said not many loans are written at around this time of year, so banks were probably locking in higher margins before an expected pick- up in January.

“I guess if you’re a saver and have money on term deposit, lock it in now. If you are a borrower, you would hold off for as long as you can.”

Cunningham said the Reserve Bank’s elevated OCR track, published in its last monetary policy statement, was “frankly ridiculous”.

Kiwibank chief economist Jarrod Kerr said the market was not buying the Reserve Bank’s line of rates being on largely hold for the next two years or so.

But he said the market had moved too far the other way, driven by global falls in interest rates.

“If moves in wholesale interest rates are supported by the Reserve Bank pivoting towards rate cuts next year, then I would think mortgage rates would be substantially ower by this time next year than where they are now,” Kerr said.

“For borrowers, mortgage rates could start falling now and I think we will see larger moves south next year.”