As talk of a negative cash rate heats up, mortgage borrowers may be wondering whether interest rates will drop further - and what they should do in the meantime.
With the Official Cash Rate (OCR) down to 0.25 percent, interest rates are already at record lows. On Wednesday, the main five banks offer floating mortgage rates from 3.40 percent and fixed mortgage rates from 2.55 percent.
The Reserve Bank indicated in March that the cash rate wouldn't change for 12 months. Infometrics economist Brad Olsen said he currently expects the OCR to turn negative by half-way through next year, at which point the Reserve Bank is also likely to implement a term lending facility, giving banks long-term funding at low rates.
"What that will do is push retail mortgage rates lower and we could see a rate at, or slightly below 2 percent within the next nine months," he said.
John Bolton, chief executive at mortgage broker company Squirrel, said based on a $400,000 mortgage and an OCR of -0.25 percent, assuming that cut is passed to retail rates, borrowers would have the opportunity to save $51 per month in principal and interest.
With at least six months until the OCR - and retail interest rates - might drop further, borrowers wanting to get maximum savings could compare the cost of a higher floating interest rate, to a lower, shorter-term fixed rate.
"For a mortgage of $400,000 on a floating rate of 3.65 percent, borrowers would pay an extra $2800 in interest over six months than a one-year fixed rate of 2.49 percent, Bolton said.
"I'd suggest fixing for a year at 2.49 percent - you can either break that early to refix at a lower rate or just wait, as the benefit will still be there is a year’s time," he added.
BNZ head of research Stephen Toplis said he also doesn't expect the OCR to be cut until around April 2021. In the meantime, retail interest rates are near the bottom.
"Financial markets are already pricing in a chance of the cash rate going negative next year so this, in turn, will already be priced into retail rates," he said.
The Large Scale Asset Purchase (LSAP) programme, which the Reserve Bank increased to a limit of $100 billion in August until June 2022, would help keep retail interest rates low.
"The RBNZ is determined to continue to use the LSAP programme to push interest rates lower. To the extent it is successful, there will be continued downward pressure on retail rates," Toplis added.
Reserve Bank spokesperson Patrick O'Meara, confirmed that if the OCR were to drop to negative, this would lower wholesale interest rates. Banks would set retail rates at a margin above that.
"We don’t expect mortgage rates or deposit rates to go negative. Rather we're in a low interest rate environment, where there is still room for those rates to fall further," O'Meara said.
Economists expect interest rates to stay low for a few years while the economy gets back on its feet. Whether borrowers choose a fixed or a floating mortgage rate, they're likely to save money.
"A number of people might decide to fix for a year at those lower rates, knowing that both they'll get that lower rate for a year and when they come to re-fix, interest rates are still likely to be low," Olsen added.