The OCR has hit 2.25%

The Reserve Bank cut the Official Cash Rate to 2.25% in late November, capping off an aggressive easing cycle that’s brought the OCR down a full two percentage points this year from its starting point of 4.25%. You’d think that means cheaper mortgages across the board. Not quite. While the OCR has fallen, one major bank raised its longer-term lending rates. Blame wholesale swap markets, where the real mortgage pricing action happens.

What the 2.25% OCR actually means

Tony Alexander, the independent economist who knows, reckons we’ve probably hit the bottom of this rate cycle. The Reserve Bank’s November cut brought the OCR down to a level last seen in mid-2022. But the Monetary Policy Committee is a bit jittery. Five members voted for the cut, while one wanted to hold. That split tells you something.

The Reserve Bank flagged multiple risks: the economy’s sustainable growth rate is now only 1.5% a year (thanks to our abysmal productivity), household inflation expectations are running hot, and businesses are waiting to jack up prices the moment growth returns. Add offshore uncertainty – including politicised central banks and the potential resurgence of inflation – and the picture gets murky.

Alexander thinks further cuts are unlikely. It’d take something seriously nasty hitting the New Zealand economy for rates to drop further from here. For borrowers, this is about as good as it gets for the foreseeable future.

Wholesale swaps are the spanner in the works

While the OCR dropped to 2.25%, wholesale interest rate swap rates – the benchmark banks use to price fixed mortgages – actually jumped. ASB’s chief economist noted that swap rates climbed right after the OCR announcement, putting upward pressure on banks’ lending costs.

Westpac was the first to move, lifting rates on two- to five-year fixed terms by 30 basis points while simultaneously cutting its six-month rate.

Markets have noted the Reserve Bank’s cautious language and started pricing in rate hikes from mid-2026. Instead of expecting more cuts, traders are now betting the OCR will climb back to 2.5% by the end of 2026, with further increases in 2027.

That shift in expectations flows directly into wholesale swap rates, which then flow into the mortgage rates banks offer you. Westpac’s senior economist noted the margin between retail rates and wholesale rates is “as narrow as we’ve seen since the start of 2024,” meaning banks have less room to absorb cost increases without passing them on.

The disconnect between the OCR and your mortgage rate

Most people think mortgage rates simply follow the OCR up and down. They don’t. The OCR influences short-term rates (like six-month and one-year fixed terms), but longer-term mortgage rates are driven by wholesale swap rates – and those swap rates reflect what markets expect interest rates to do in the future, not where they are today.

So even though the OCR just hit 2.25%, if wholesale markets believe the Reserve Bank will start hiking rates again in 2026, those expectations push swap rates higher right now. And higher swap rates mean higher longer-term mortgage rates, even while the OCR is still falling.

That’s exactly what we’re seeing. ASB says mortgage rates are “as low as they will go,” despite the OCR sitting at 2.25%. The future is already priced in.

What the major banks are predicting

ANZ thinks the OCR will stay at 2.25% through 2026, with mortgage rates starting to rise from mid-year. They’re suggesting borrowers consider longer terms now, especially since there’s minimal difference between one- and three-year rates right now.

ASB reckons the OCR cuts are finished, and mortgage rates are “as low as they will go.” Their economists point to the swap rate jump as proof that markets are already pricing in future rate increases, which means mortgage rates could start climbing sooner rather than later.

BNZ expects the mortgage rate downtrend to end soon, with rates starting to increase from the second half of 2026. They think many fixed rates will remain below 5% for a significant portion of the year, but the writing is on the wall: rates are heading up, not down.

Kiwibank agrees we’ve hit the low of the current cycle. Their economists note that “the hurdle for an additional cut is high” and warn that wholesale rates have already lifted as markets moved from expecting further cuts to pricing in rate rises from mid-2026.

Westpac takes the longest view: they expect the OCR to stay at 2.25% until mid-2027, when the Reserve Bank will start hiking it toward 3% by the end of 2028. But market pricing is more aggressive, already factoring in a 2.5% OCR by late 2026.

What this means for residential property investors

First, if you’re refinancing soon, don’t wait for rates to drop further. They probably won’t. The OCR might hold at 2.25%, but wholesale markets are already pricing in future increases. Some banks have already started lifting longer-term rates despite the recent OCR cut.

Second, the strategy Tony Alexander suggests makes sense: consider fixing for three to five years, or split your mortgage across multiple terms to spread risk. With one-year rates around 5.49% and three-year rates only marginally higher at some banks, locking in now could save you from higher rates down the track.

Third, understand that even though we’re at the “bottom” of the cycle, many investors rolling off old fixed rates are still seeing significant savings. If you fixed at 6.5% or 7% back in 2023, dropping to the mid-5s is still a substantial improvement to your cashflow. That party’s ending, though.

Fourth, factor this into your investment decisions. Property markets respond to interest rate expectations, not just current rates. If the market believes rates will climb through 2026–2027, that’ll impact buyer behaviour and property demand before the actual rate rises hit.

Finally, don’t assume the low-rate party from 2020–2021 is coming back. The new normal appears to be mortgage rates in the mid-5s, possibly creeping higher through 2026. Alexander notes that wholesale swap rates jumped immediately after the OCR announcement. Markets are looking ahead, not backward. Plan your portfolio accordingly.

Questions about structuring your property finance? The team at Goodwins can help. Call 0800 GOODWINS.