Squirrel’s David Cunningham predicts home loan rates will drop below 4% early in 2026 if the Official Cash Rate (OCR) eases to 2.25% by late November. His forecast comes from an AI model analyzing eight years of Reserve Bank data on retail and wholesale interest rates.
The model shows that a one-year fixed mortgage rate, currently above 4%, could fall to just under that mark in early 2026. The key driver is expected to be banks lowering term deposit interest rates, which would reduce their funding costs. As banks pass on these savings, mortgage rates would follow.
Cunningham explains that banks in New Zealand mainly serve their overseas shareholders and aim to maximize profits. This goal makes their interest rate moves fairly predictable. Banks usually adjust rates together, though there can be timing differences depending on whether rates are rising or falling.
The modelling considers two main factors influencing the one-year fixed home loan rate. One is the one-year wholesale interest rate or swap rate, which reflects the market’s expectation of the average OCR over the coming year. When this swap rate changes, mortgage rates usually move in the same direction.
The other factor is the cost banks pay on customer deposits. Deposit rates include transaction accounts, savings accounts, and term deposits. Term deposits are the largest portion, about 50% of total bank deposits, and their rates tend to move with wholesale interest rates but adjust slowly to OCR changes.
Data from the Reserve Bank shows banks pay retail customers about 0.7 percentage points more on six-month term deposits than they pay on wholesale funding. Using historical rates and the predicted 2.25% OCR, the AI model forecasts how deposit costs and swap rates will evolve through 2026. This analysis points to a one-year fixed mortgage rate just above 4%.
Cunningham expects a headline rate of 3.99% will appear because banks like to use ‘charm pricing’. This tactic makes rates ending in .99 look more attractive. Once one bank offers a mortgage below 4%, others are likely to follow quickly, given the oligopoly structure of New Zealand’s banking sector.
Regarding longer fixed terms, he notes that two-year rates are likely to stay higher than one-year rates. This pattern reflects market concerns about possible future OCR hikes. A similar situation occurred after COVID, when the one-year mortgage rate dropped to 2.1%, but the two-year rate stayed at 2.5%.
A mortgage rate under 4% would provide relief to borrowers and could benefit New Zealand’s struggling economy. Cunningham argues the Reserve Bank’s aggressive rate hikes over the past two years may have been excessive, contributing to economic weakness.
If the OCR cut happens as expected, home loan rates could finally ease in early 2026, offering some support to borrowers and the wider economy.
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