The great mortgage reset has kicked into a new, higher gear in the past few months

Was it something the Reserve Bank said?

Since May the country's homeowners have gone into overdrive refixing their mortgages - and the changes in fixed-rate term composition of the outstanding mortgage pile in recent months have been substantial.

As we know, from the start of last year onward, those with mortgages started going 'shorter' with their fixed rate terms as they began to anticipate that the RBNZ would begin to lower the Official Cash Rate, then at a cycle high of 5.5%.

The first cut to the OCR came in August 2024, but as people (correctly) picked that further cuts would come, then so the fixed rate term durations just became shorter and shorter.

The peak of this came in January of this year when some 56.8% of the country's total mortgage pile was either on floating rates or due a reset within six months - so, by July.

And, yes, percentages alone can be meaningless, so, to put that in a very meaningful way, about $210.7 billion worth of mortgages as of January were either on floating rates or were due to be refixed by July. Big number.

But while this refixing has been going on, clearly significant numbers of people have still been banking on further rate reductions.

Staying short

How rewarding this process has been would definitely depend on individual circumstances. But the upshot was that a lot of people remained 'short' in the first half of this year.

However, there's been a big change since May. And it's probably no coincidence that there was an OCR decision on May 28, in which the rate was dropped to 3.25% from 3.5%. Significantly also there were indications from that decision that the following decision in July may see the OCR cuts 'paused'.

And this duly happened. But since then of course we've seen the RBNZ's big 'dovish pivot' of August 20, with a further cut to 3.00% and clear indications the OCR will likely be 2.5% by the end of 2025.

What this latest twist from the RBNZ will do when it comes to the mortgage rate strategies of the country's home owners, we will find out later.

But we can see that the May announcement appeared to be very triggering for many, given that it could have been taken to mean there weren't many more rate reductions to come.

And it was a trigger that was interpreted by people as 'go longer, but don't go much longer'.

A lot of people seem to have decided that a year is a just fine duration to set their mortgage term for, while they have a good look at things and decide what interest rates are going to do in future.

Making assumptions

The RBNZ's monthly Loans fully secured by residential mortgage, by time until next repricing (S33) data series doesn't tell us exactly what fixed rate terms those with mortgages are on, but we can make some reasonable assumptions that won't be too far wide of the mark.

For example in May, the amount of mortgage money that was due to be refixed in more than six months time and less than or equal to one year (so, in other words a rough proxy for one-year fixed mortgages) was $100.239 billion. Now, of course, this wouldn't just be one-year fixed mortgages because the figure would include those who had mortgages fixed for longer than a one-year term, but now just had one year of it left to go. But I think it gives us a reasonable idea.

What we can say is that, fast forward from May to July, and that comparative six months-one year figure had risen by 18.4% - by over $18 billion - to $118.661 billion.

That's a lot of mortgages being moved on to one-year fixed rates.

The two-year duration appears to have attracted some attention as well, but not as much, with the amount outstanding that has two years till a refix having risen by $9.204 billion between May and July from $65.421 billion to $74.625 billion. 

Adding some figures up, the above tells us that the one and two year totals collectively increased by a thumping $27.62 billion in just that two month period.

Where did it all come from?

Well, between May and July the amount of mortgages that were on floating rates dropped from $51.901 billion to $47.421 billion, while the amount that was due a refix in three months' time plummeted by about a quarter from $82.831 billion to $62.575 billion.

Longer, but not much longer

So, the combined drop in the floating and three month figures was just under $25 billion. People have gone longer, but not - in many cases - a lot longer.

If we look at the $118.661 billion one-year-till-refixing figure, this is actually the highest tally for this duration in this data series, which dates back to 2016. But it's not the highest percentage of the total mortgage pile that's been seen by the one-year duration.

The July one-year figure makes up just under a third of the total mortgage pile (which was $380.966 billion as of July). But if we look at December 2020 there was over $115 billion on the one-year duration - and that was over 38% of the then mortgage pile total of just over $300 billion.

It's worth pausing to reflect on that for a moment. Back in the pandemic days of late 2020, big numbers of us decided that fixing for a year was the best idea. This was at a time when the OCR was just 0.25%.

The RBNZ figures for monthly new mortgage 'special' rates tell us that in December 2020 the average 'special' rate for one-year was just over 2.5%. Great rate. But...

What about something a bit longer - five years? Well, that was just over 3%. For FIVE years...

So, if you had taken that one up then you would still be on that now and would have completely avoided all the mayhem in the meantime! Hmm. (For the record, as of December 2020 there was about $3.5 billion of mortgage money up for a refix in five years - so, some people, but not many did get on that particular train.)

As for the one-year rates, by December 2021 these were over 3.5% and by December 2022 they were 6.4%. Ouch.

Seemingly we don't always get these duration decisions 'right'!

How are we doing now then, do we think?

The average one-year rate as of July this year was just over 4.85%. In all probability, with the OCR currently seen as likely to trough at 2.5%, the one-year rate will go lower yet - but will that still be the case in a year?

Some economists are starting to suggest that with inflation still very much alive and well, its possible that after hitting a bottom of 2.5% the OCR could even start rising again in 2026. 

Well, that should keep us on our toes. 

The great reset continues 

In the meantime the great reset is continuing apace.

Recall we said at the top of this article that in January over $210 billion worth of mortgages - 56.8% of the total mortgage pile - were either on floating rates or due a reset within six months. 

By May just over $199 billion worth of mortgages - 52.7% of the total - were on floating or due to be reset within six months.

By July a little over over $172 billion of mortgages were floating or due a reset - so, a $27 billion (13.5%) fall in this total in just two months. What that means is that now 45.2% of the total mortgage book is either floating or due a refix.

It's come down a lot - over $38 billion since January - but $172 billion of mortgages to be reset in the six months through to next January is still a very high amount.

And the whole mortgage book is still very 'short', given that many of the people who were on super short terms have only extended as far out as a year.

In January some 83.4% of the outstanding mortgage stock was due to be reset in a year. By July this was down to 76.5%. But if we compare this with July of two years ago, then the comparative figure was a much lower 63.2%.

What this all means is that the country's mortgage stock is still very 'responsive' (IE in a short period of time) to changes made to interest rates. 

This is going to be working well for us in the short run as we assume mortgage rates may still fall a bit further. But of course once the OCR does start to rise again it means we'll see rises in mortgage rates relatively quickly as well. Swings and roundabouts.