What the Heck’s Happening with Interest Rates?

If you’ve been keeping an eye on mortgage rates over the past few months, you may understandably have felt a little confused.

Some fixed mortgage rates fell.

Others barely moved at all.

And a few even went up! (Despite news headlines telling us interest rates were easing!)

In this post, our mortgage broker breaks down how banks set their fixed mortgage rates, why the past six months have been a rollercoaster, and what that tells us about mortgage rate decisions going forward…


FIRST, HOW ARE FIXED RATES ACTUALLY SET?

Before a bank can ‘sell’ you a mortgage interest rate, they have to effectively ‘buy’ it from a supplier first. That wholesale price is called the swap rate.

There are different swap rates for different fixed terms, and they each reflect what the financial markets currently expect in terms of future interest rates, inflation risks, global economic conditions, supply and demand for money, etc.

(We explain more about swap rates - and how they flow through to mortgage pricing - in our most recent blog post, here. ) 

SWAP RATES MATTER MORE THAN HEADLINES

There’s a lot of talk in the news about the Official Cash Rate (OCR) - but swap rates matter more than these headlines.

Why? Well, swap rates change every day, based on where markets expect interest rates to sit over specific fixed periods, and on what large investors think will happen to the economy in the future.

Because of this:

• Swap rates often move before the OCR does

• Fixed mortgage rates can change even when the OCR stays still

• Longer-term fixed rates can behave very differently from short-term rates

… and this is exactly what we have seen over the past several months in New Zealand.

THE PAST SIX MONTHS

If we look at the period from late August 2025 through to now (early Feb 2026), wholesale swap rates followed a very clear pattern…

Phase 1: The Great Easing

After years of rates going up, the market finally started to breathe a sigh of relief in late winter:

• Swap rates across most terms gradually fell (in other words, the ‘wholesale price’ of money started to drop)

• Markets became more confident that inflation was cooling, and

• Expectations for future OCR cuts increased (everyone assumed the Reserve Bank was about to hit the ‘down button’ on the Official Cash Rate)

All of this pushed down the wholesale cost of money (particularly for the 6-month and 1-year fixed terms, because the market knew the immediate future was looking much cheaper!)

Phase 2: Reality Bites

Unfortunately, from late October 2025 onward:

• Inflation data proved more persistent than expected

• Markets reassessed how soon rate cuts might occur

• Longer-term swap rates began to climb

And, by January this year:

• 2- to 5-year swap rates were noticeably higher than their October lows

• The wholesale market began pricing much more cautiously
  
  

WHAT HOME-OWNERS SAW

Short-term Fixed Rates Fell

6-12 month mortgage rates declined the most over this period.

Why? Because the shorter-term swap rates fell earlier, and because shorter terms carry less risk for lenders than longer terms, banks felt comfortable competing aggressively. Competition between banks was strongest here.

Mid-Term Rates Moved Less, And Unevenly

Two- and three-year mortgage interest rates fell only slightly, stabilised again very quickly, and in some cases even edged higher again.

While banks initially benefited from falling swap rates, they rose again before they could fully pass those savings on, and banks became more cautious about medium-term inflation risk.

This is why many borrowers felt that “rates stopped falling”… even as our news headlines were busy talking about improvement!

Long-Term Rates Stayed Stubbornly Stable

Four- and five-year fixed rates changed very little overall, because:

• Long-term swap rates rose the most during the latter part of the period

• Banks price long-term certainty conservatively

• There was little incentive to discount aggressively

TIGHTER BANK MARGINS

One of the most interesting outcomes of this period (that isn’t immediately obvious from rate tables) was the gap between wholesale swap rates and average advertised mortgage rates narrowed.

Turns out, the banks were competing with one another more than what we might have assumed – and all that competitive pressure limited how much profit margin they could maintain, especially on the 2-5 year fixed terms.

IF WHOLESALE COSTS FELL, WHY DIDN’T MORTGAGE RATES FALL MORE?

There are several reasons banks move cautiously:

1. Wholesale markets are volatile
   Banks avoid repricing aggressively if they think moves may reverse - which they did.

2. Fixed lending locks in risk
   Once a mortgage rate is offered, the bank carries that risk for years.

3. Capital and funding rules matter
   Not all bank funding is swap-based; retail deposits and long-term funding add complexity.

4. Competition varies by term
   Banks don’t need to discount equally across all fixed periods.

In this case, banks were willing to compete the hardest where the risk was lowest: short-term fixes (6-12 months).

COMMON FRUSTRATIONS ANSWERED

Understanding the wholesale vs retail picture helps explain several common frustrations:

• “Why did my friend get a better rate on a 1-year fix?”
  Because wholesale short-term costs fell more — and banks competed harder there.
  

• “Why didn’t 3- or 5-year rates come down?”
  Because longer-term wholesale costs rose again before savings could flow through.
  

• “Why do banks change rates even when the OCR doesn’t?”
  Because swap rates move on expectations, not just current OCR settings.

WHY THIS MATTERS FOR FUTURE DECISIONS

Looking at what has happened in the past 6 months provides us with a framework for thinking about future rate movements:

• Fixed mortgage rates often move before official policy changes

• Different terms behave differently!

• News headlines alone are not a good guide to pricing decisions

• Structure and risk management matter more than trying to perfectly time your refix.

And as a reminder, this is why many borrowers benefit from:

• Splitting loans across terms

• Balancing certainty and flexibility

• Reviewing structure, not just headline rates

NEXT IN THIS SERIES

This blog post gives the important background for our upcoming series. In future articles, we’ll be exploring:

• Whether to fix now or wait

• Which fixed terms make sense in different conditions

• Why economists often disagree, and

• How households can reduce risk during mortgage re-fixing
  

 
BROKER’S FINAL THOUGHT

Trying to perfectly time interest rates is incredibly difficult - even for experienced mortgage brokers like us! If you’re approaching a mortgage re-fix or planning your next move, understanding why rates move and how wholesale costs influence bank pricing is far more valuable than trying to predict exactly what comes next. 

Understanding and context helps remove emotion from your rate decisions, helps you ask the right questions, ignore misleading noise, and ultimately choose a mortgage strategy that fits your life, not the headlines.

At WealthHealth, we help people look beyond the rates and structure their mortgage in a way that gives them confidence, flexibility, and long-term peace of mind. If you’ve got a fixed rate ending (or if you’re already on floating and unsure what to do) let’s talk - click here to call or email our mortgage broker Craig.

YOU MIGHT ALSO LIKE:

• What are Swap Rates?
• Let’s talk economist predictions
• Paying a mortgage off faster (for realists)

Our blog is not intended to be taken as personal advice
and is for informational purposes only.
Before acting on this information, contact WealthHealth mortgage brokers
to ensure it is suitable for your circumstances.