New Zealanders are fast becoming experts on the OCR – the official cash rate. While we may have previously paid some attention when the Reserve Bank did its review about every two months, it’s now in the news all the time.
That’s because the OCR is the biggest factor influencing the interest rates banks charge for mortgages and it’s been on a rapid climb from its historic low of 0.25% in September last year.
In his most recent announcement in November this year, Reserve Bank Governor Adrian Orr hiked the OCR by the largest amount in New Zealand’s history – 75 basis points, or 0.75%. It now sits at 4.25% – 4% higher than it was just 15 months ago.
How the OCR affects mortgage interest rates
So, why is there so much concern about the increasing OCR? That’s because the OCR is the rate at which banks can borrow money from the Reserve Bank in the short term. When the OCR goes up, this means the banks need to increase what they charge customers. Conversely, when the OCR falls, this lets banks offer cheaper loans.
With the OCR rising so rapidly, banks are under pressure to increase their interest rates – including for mortgages – so they can maintain a profitable margin. This then ripples through to the market, where homeowners with mortgages have to pay more to service their home loans.
As this financial pressure comes on, consumers spend more of their money servicing their mortgages and less on other goods and services, as they can’t afford them any longer. Hence another term we’ve been hearing and reading about recently: the ‘cost of living crisis’.
While these ‘self-inflicted’ market dynamics sound cruel, this behaviour is exactly what the Reserve Bank wants, in order to curb inflation. As interest rates rise, people spend less because they have less money or because there’s a better incentive to save. When we save more or spend less, this means there is less pressure on price rises, which acts to reduce inflation.
Time for OCR rises to filter through
There is often a bit of a lag between when the Reserve Bank announces an increase in the OCR, when banks increase their interest rates in response, and when we actually feel it in our pockets. One reason is that many New Zealand homeowners prefer fixed term to floating mortgages.
This means that someone who fixed their mortgage for two years in September 2021, for example, will only feel the effects of an interest rate increase in September 2023. Unlike someone who was on a floating mortgage and who immediately had to increase their repayments, the homeowner in the example above will only experience higher interest rates and repayments further down the track.
While this is a good position to be in for the duration of the two-year fixed term, the homeowner will be in for a huge jump in interest rates and repayment when it expires. When you consider banks were charging home loan rates starting just over 2% in September 2021, this customer could now be looking at rates of around 7% when their loan rolls over in September 2023 and if the OCR increases as anticipated.
There are stories in the news about homeowners who are facing the scary prospect of their home loan repayments doubling when they come off fixed-term mortgage periods.
Seek expert advice to navigate higher rates
While homeowners can’t insulate themselves from the full impact of increasing mortgage interest rates, they can make sensible decisions about their next steps. According to mortgage and finance industry web service, NZ Adviser, more people are looking beyond the banks to help them secure a mortgage for the first time or when they’re increasing their borrowing.
They say that, while rising interest rates are troubling, they’re not out of the ordinary when compared with what’s happened in NZ in the past. “Historically, 6% or 7% rates have been about the average for Kiwi borrowers, and that’s where the one and two-year rates currently sit,” NZA said, quoting Tim Kearins, owner of Century 21 New Zealand.
“Going forward, the banks will do all they can to sharpen their pencils, but more borrowers will also be turning to brokers” he added.
Working hard for every percentage point on your mortgage is well worth the time and effort. And, if you’re building a new home, it also makes good sense to future-proof your home and make sure it’s built from quality materials and embraces all the latest technology and sustainability trends to last well into the future.
The information and articles published on this website are true and accurate to the best of the Global Finance Services Ltd knowledge. The information given in articles on this website should not be substituted for financial advice. Financial advice should always be sought. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or their employees liable.