Three-year fixed mortgage rates have fallen below 4 per cent at two major banks, and experts say the Reserve Bank's more pessimistic shift is behind the record low deals.

Until now, sub-4 per cent rates have been offered for one- and two-year fixed terms, but on Friday BNZ cut its three-year term to 3.95 per cent - down from 4.2 per cent - matching a move by rival ASB bank.

Locally owned TSB bank will also offer the same rate as part of its promise to match any rate advertised by the Australian-owned banks.

Kelvin Davidson, senior property economist at CoreLogic, said the key driver was the change in view from the Reserve Bank.


Last week the central bank kept the official cash rate (OCR) on hold at 1.75 per cent, as expected, but said the next move was likely to be down.

That was a change in tack from the last OCR review in February, when the bank said the next move could be up or down.

Bank economists have responded by predicting a cut could be made as soon as next month.

Davidson said that instead of the next move from the Reserve Bank being a rise in the long term, it was now more likely to be a cut in the short term, and that had given the banks the confidence to offer deals for a longer time horizon.

"It's a very competitive banking environment at the moment particularly in a quieter housing market."

Davidson said a lot of activity was coming from mortgage-holders refixing loans and banks trying to convince people to switch.

"They are targeting first home buyers but also looking to attract people away from other banks."

John Bolton, managing director of broker Squirrel Mortgages, expected all the major banks to match the rates.


"If they are not doing it by advertised rates, they are certainly doing it by negotiation," he said.

Bolton said the Reserve Bank's pessimistic view had driven wholesale swap rates lower, particularly for longer terms, making funding cheaper for the banks over a longer term.

"The long end of the curve has fallen which means the market doesn't see rates going up any time soon."

Kiwibank was the first to respond to the Reserve Bank's change in view, dropping its five-year rate to 4.29 per cent on Monday (April 1).

Bolton said that was the lowest five-year rate he had ever seen and the three-year rates were also the lowest he had seen.

"It is the first time we have had three-year rates below 4 per cent."

Bolton said the rates could go lower if the OCR was cut, pointing to the Australian market where homeowners were able to get mortgage rates as low as 3.5 per cent.

Australia's official cash rate is 1.5 per cent.

"I think it is conceivable if the OCR is cut we could see mortgage rates around 3.5 per cent here," he said.

But Davidson said he was cautious about rates falling further.

"They are already really low."

He also pointed to upward pressure on the banks, with interest rates rising internationally and on the domestic front, the Reserve Bank proposing higher capital requirements for banks.

"They [capital requirements] won't fully take hold for five years but could push up rates."

Bolton said some investors were looking at fixing for five years as a way of getting past the proposed capital increases, which are expected to push up mortgage rates.

But he urged caution on fixing for longer terms.

"Five years - you've got to be a little bit careful. There are plenty of Kiwis out there that have been burned by break fees in the past."

Break fees are due when a mortgage holder asks to get out of a fixed term early - often because rates have fallen.

"The longer the fixed rate, the bigger the risk. Five year terms can have high break fees."

Bolton said people who were thinking about selling their house in the next two years should avoid fixing for longer terms.

Karen Tatterson, a mortgage broker with Loan Market, said most people on a fixed-term mortgage would either be the same or worse off by the time they paid the break fee if they tried to switch to the lower rate.

But those with less than 60 days to go on their fixed term would have the most to gain from the lower interest rates.

"If you are close [to the end of your fixed term] it is worth having a look."

She said most banks would allow people who had less than 60 days to go to pre-book the low rate even if the special was due to end before their fixed term was up.

Anyone tempted by the lower rates should contact their bank or mortgage broker to find out how much it will cost to break their fixed term.

But they should be prepared to make a quick decision. The quoted cost is only valid for that day.

Tatterson said people who switched banks should also aim to keep the term of the mortgage the same, or they would end up paying more interest even if the regular payments were lower.

Typically the term is over 25 or 30 years when people first start paying off a mortgage.