NZ Mortgage Interest Rates Prediction 2022/23

It’s the time of the year when the Mortgage Lab buffs up our Crystal Ball, gazes into the infinitely complicated world of economics, and comes up with sufficiently generic interest rate forecasts/predictions to wow and amaze the crowd. But first…

(information accurate as of 8th April 2022)

What happened with mortgage interest rates in 2021?

After the turbulence of Covid-19 all but wrote off forecasts for 2020, we didn’t even bother guessing what was going to happen in 2021.

Here’s what happened in 2021 for mortgage interest rates.

  • 1-year interest rates were trending down in the first half of the year but from July to October shot up at a rate that not many predicted. In January 2020, the 1-year rate was typically around 2.39%. Until July, we had been seeing 2.19% regularly given for 1 year. By December, the advertised rates were high as 3.65%. This is back to December 2019 levels within a few months.
  • 2-year interest rates were up also, unsurprisingly, to ~4.24%, after dipping as low as 2.45% in April 2020.
  • Longer-term rates are up quite a bit. For quite some time you could get a 2.99% rate for 5 years with a lucky few achieving 2.85%. By December 2021, the 5 year rate was at ~4.99%%.
  • We saw some amazing specials for new-build mortgages as low as 1.68% and now sitting at around 2.1%. These were floating rates but can be discounted for up to 2 years. Note that although other rates have jumped up by over 1%, these discounted rates were only up ~0.15% at the end of 2021.
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What's happened with house prices in the 12 months to February 2022?

It will come as no surprise to anyone who has watched, read, or listened to a news article in the past 12 months that housing is up in a big way. The national median is up by 20.6%% to $880,000 with areas like West Coast and Canterbury up by around 30%. Auckland remains the most expensive area with a median house price of $1,200,000 however this has been stagnant for a few months now (potentially due to the long lockdown experienced in the area). (REINZ September 2021 Statistics, released 15th February 2022).

2022 Home Loan Rates Prediction

The Reserve Bank and the government have implemented a range of changes in late 2020 and 2021. These include reinstating the Loan to Value Ratios, particularly for investors, completely overhauling the tax deductibility of interest paid on mortgages, and raising the subject of Debt to Income Ratios. At least 2 banks have implemented the Debt to Income Ratios even though they are not required by the Reserve Bank yet.

But the big change to lending was the implementation of the Credit Contracts and Consumer Finance Act on the 1st December 2021. This act vastly changed how banks are required to assess mortgages and it has all but put the brakes on lending. You can read all about the CCCFA here.

At a very simple level, in the property market, interest rates are about controlling the lending flow. If money is a little too easy to borrow (often causing inflation), the Reserve Bank raises the Official Cash Rate (OCR). If money isn't flowing enough, then the Reserve Bank may lower the OCR. Inflation is currently far above the goal band and on the 23rd February 2022 raised the OCR by 0.25% to 1%. They also reviewed their forecast for the OCR to be 3.4% by 2024. The interest rates at the banks have already factored these price rises in which is why interest rates have gone up more than the OCR has at the time of writing.

So where will mortgage interest rates be in 1-2 years? Mid 4% is still a historically-low interest rate (we know, we know, we said that in 2019 and 2018!), the risk seems to continue to be to the upside. In other words, it seems more likely that the interest rates will move towards 5% rather than 2%. The important question is, will it be back up to 7%, 8%, or even (as per 2007) 10%? And if it does increase drastically, can you afford your mortgage at 8%? (Look for our #AimFor8 campaign to see several ways to plan on paying your mortgage at 8% in the near future!)

Having said that, the Reserve Bank continues to pull the various policy levers (LVR, DTI, etc) and therefore we don't see 8% being a reality in the next 5 years. They have plenty of options to cool a housing market if they need, without raising interest rates significantly.

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Will NZ interest rates continue to go up in 2022?

We predict that the most common 1 year discounted fixed rate will be 4.8% by December 2022. At the time of writing, the discounted rates are between 3.99% to 4.2%. This is a small but still meaningful interest rate jump, particularly for those coming off the low 2% interest rates.

2022 Outlook for First Home Buyers

The Reserve Bank has reinstated LVR restrictions meaning borrowing over 80% is more difficult (but, importantly, not impossible). With properties having risen so much in the past year, a lot of first home buyers will be falling into this borrowing level. 

Add to that the increasing scrutiny that CCCFA has put on first home buyers' applications and it's clear that buyers are going to find it harder to borrow in 2022. Applicants need to make sure their spending is controlled for at least 3 months prior to applying for a mortgage. A good trick is to use something like PocketSmith to categorise your bank statements and find out where you are spending too much.

Some reprieve came for the lower quartile of first home buyers when the government adjusted the maximum levels for the First Home Grant and First Home Loan. The tests that a bank must put an applicant through are still onerous however; mortgage applicants must be able to afford their mortgage at a rate of ~6.8% - and there is less room for "grey area" decisions. We predict that the Reserve Bank will hold off on further bonuses for first home buyers.

Summary of interest rate predictions for 2022:

As always, here's a scorecard for next year:

  • Interest rates up slightly (1 year - 4.8% for December 2022)

Are you looking at re-fixing your mortgage?

Visit our Mortgage Re-fix page or contact one of our brokers directly.

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