For years, the country’s housing market has been on a seemingly unstoppable upward trajectory, and despite initial predictions, the pandemic’s arrival arguably only added fuel to the fire. Now, with rising inflation, property owners and first-home buyers are starting to notice the pinch as historically low interest rates start to climb. So, how does inflation affect home loan rates, and will it stop you from taking out a new home loan?
For the past 30 years, interest rates have moved with inflation
Inflation has an indirect effect on home loan rates by influencing the economy and the Reserve Bank of New Zealand’s monetary policy decisions. The relationship is determined by how the Reserve Bank (RBNZ) adjusts the official cash rate (OCR), usually done to cool off or jump-start the economy.
When the RBNZ recently increased our official cash rate (OCR) to 1.5% it had a flow-on effect, with banks having to pay a higher interest rate on their borrowing. Banks aren’t going to lend money to people at rates less than they can receive from the Reserve Bank, which inadvertently means an increase in the interest you pay on your mortgage.
What inflation means for first home buyers
If you’re thinking about buying your first home, the current economy could be disheartening to your homeownership dreams. With inflation raising your monthly expenses, you might be asking, ‘Is now really a good time to get a mortgage?’
Economists predict that interest rates, particularly short-term rates, aren’t going to stop rising anytime soon, but mortgage rates are still (historically) quite low. With mortgage repayments to increase over coming months and year, the borrowing cost of owing a house is only going to get expensive.
Inflation can also help borrowers if it causes wages to increase more than the rate of inflation. A basic rule of inflation is that it causes the value of a currency to decline over time. In other words, cash now is worth more than cash in the future. So, if you already owe money and you have more money in your paycheck, you pay less interest to the lender if you use the extra money to pay off your debt early.
What inflation means for current homeowners
The bad news – inflation means your monthly mortgage repayments are likely to rise. If you have a fixed-term mortgage, you won’t be immediately affected, but when your current term ends, you could find that your next rate is a lot higher. If a portion of your mortgage is floating, you’ll want to start budgeting for a percentage hike.
Property is still a sound investment
Although inflation may cause your mortgage repayments to increase, property in New Zealand is still a comparatively sound investment – if you have your ducks in a row. If you’re a first-home buyer and have a deposit saved, it could be the best time to talk to your mortgage broker. For homeowners starting to feel the pinch of inflation, reassessing your mortgage structure could help you find ways to keep your monthly home loan repayments as low as possible.
Need help budgeting for increasing interest rates? Talk to the expert team at Global Finance today.
**These are general guidelines and are by no means a reflection of bank or lending policies