From lending criteria changes to borrower preferences, recent trends indicate an improving lending environment with renewed optimism among both first-home buyers and investors. Here’s a look at what’s happening in the market right now.

February OCR update

The Reserve Bank has cut the official cash rate (OCR) by 50 basis points to 3.75 per cent, marking the fourth consecutive reduction since August 2024. This move, aimed at countering recessionary pressures, aligns with market expectations as growth forecasts remain weak at 1.2 per cent for 2025. Meanwhile, Australia's central bank only reduced its rate by 25 basis points, signalling greater confidence in their economy. On a positive note, New Zealand’s farmers' confidence is at a 10-year high, which could benefit the broader economy. Looking ahead, further 25-basis-point cuts are expected in April and May. Those considering fixing mortgage rates should act soon, as we may be reaching the low point in the longer term interest rate cycle.

Interest-rate fixing preferences shifting

While six month and one-year fixed rates have been the most popular choice in recent times for borrowers, there is growing uncertainty about how much further rates will drop. A significant portion of borrowers are still opting for short-term fixes, but the proportion of doing so has declined compared to late 2024. The introduction of competitive two and three-year fixed rates has started to drive a widespread shift towards longer-term fixes, as borrowers start to predict the bottom of the longer term rates.

Bank processing and lending criteria easing

The bottlenecks in loan processing that caused delays at the end of 2024 have now largely cleared, leading to significantly improved turnaround times for mortgage applications. We feel that banks are showing a stronger willingness to lend, with subtle but meaningful relaxations in lending criteria. This includes more flexibility around boarder income, high loan-to-value ratio (LVR) lending, and historic missed payments. Some lenders are also offering more generous cashbacks, particularly to first-home buyers, while allowing borrowers to pause KiwiSaver contributions to improve their serviceability assessments. Additionally, the banks' servicing test rates are continuing to drop as the OCR drops, meaning people can borrow more money.

First-home buyers returning to the market

We have noticed a surge in first-home buyer activity, with many entering the market ahead of anticipated interest rate reductions. With banks becoming more accommodating and offering pre-approvals more readily, many young buyers are accelerating their homeownership plans. Mortgage advisers have observed increased enquiry levels and settlement activity, particularly as lower interest rates fuel confidence.

Investor interest remains, but with caution

Investors continue to be present in the market, but they are taking a more measured approach. Rising costs, including council rates, insurance, and maintenance expenses, mean investors are carefully assessing their options before committing to new purchases. Many are showing a preference for newer builds, particularly on smaller sites in areas like Tauranga and Christchurch, where enquiry levels remain strong.

One key factor affecting investors is debt-to-income (DTI) ratios, with some applications now approaching the upper limit of seven. While banks are offering better test rates, DTI restrictions are expected to become more prevalent in 2025, influencing investment decisions further. Additionally, many lenders have removed the requirement to include rates and insurance in servicing calculations for investment properties, making financing slightly more manageable.

Looking ahead

The mortgage market is evolving, with borrowers expressing greater optimism and lenders displaying increasing competition. While first-home buyers are returning with renewed confidence, investors remain cautious but engaged. Lending criteria are easing, and banks are showing a growing willingness to approve loans, making this a promising period for those looking to enter or restructure their mortgage commitments. As interest rates and lending policies continue to shift, we will remain at the forefront, guiding clients through these changes to secure the best outcomes.