Can mortgage rates drop any further?

Graph on laptop screen

Since the country has settled into Alert Level Two, we're now starting to see retail banks lowering their interest rates.

It appears that most of the major banks are now offering a sub 3% mortgage rate across their one-year and two-year fixed terms, and from the latest OCR announcement, we were reassured that the Official Cash Rate would remain at 0.25% until 2021. Can we then expect the interest rates to stay as they are for another 12 months or is there still some wiggle room?

Geoff Bascand, deputy governor of the RBNZ, spoke to NZ Herald earlier this week, saying he "believes the Reserve Bank's bond-buying programme, and cut of the Official Cash Rate have effectively reduced wholesale lending rates for banks. Yet lenders aren't doing enough to pass on rate cuts to home loan borrowers."

HSBC and China Construction Bank still have the lowest mortgage rates in the market at 2.80% for one year, followed by TSB with 2.89%, which indicates that there is definitely some margin for the big five banks to lower their interest rates further for home loan borrowers. But can we expect those rates to drop lower, and if so, when?

Tighter credit policy

It is clear that banks are tightening up their credit policies, and lending has become a lot tougher since Covid-19. The removal of the LVR restrictions by the RBNZ has not helped with easing lending policies at all. If anything, it has created false hope for first home buyers with a low deposit.

Like most other business, banks have taken a loss in their profit level and have shifted their focus on building a secure lending book. Once this is done, surely, we'll start to see their focus shift back to generating revenue and increasing their lending book again. But how far away will that that be? And is it unfair to the consumers and home loan borrowers that they're not getting the benefit of the current cheap wholesale rate?

How does this impact me?