OCR rise could sink scores of buyers with pre-approval

More home-buyers are at risk of losing pre-approval as a result of the Reserve Bank’s decision to increase the Official Cash Rate by 0.25 percentage points to 1%.

The last time Kiwis saw a 1% cash rate was two years ago, and based on the warnings delivered in the Reserve’s Monetary Policy Committee statement they should expect further rises this year.

While the committee noted that house prices had "begun to ease", house prices were still "above their sustainable level".

The Reserve Bank is forecasting the OCR to peak at 3.25% by 2023, up from its forecast peak of 2.5%, made in November.

The 0.25 point increase in the OCR will have an impact on buyer budgets and may result in a retreat from the market by many first home buyers.

James Wilson, head of valuation at OneRoof’s data partner, Valocity, said the rise posed the biggest threat to buyers who had only just qualified for pre-approval at the old rates.

“Buyers who are on the hunt or seeking to make an offer may be hit the hardest. They might find that a change in interest rates affects what they are able to offer or what they can afford to repay.”

CoreLogic head of research, Nick Goodall, said that pre-approved buyers in that situation would need to go back to their banks to ensure their planned purchase would be approved under the new interest rates.

Economists had their money on 0.25 points

The OCR increase was not a surprise. Economists and other commentators spoken to by OneRoof before the Reserve Bank’s statement had their money on a single shot rise of 0.25 percentage points.

No one was expecting the Reserve Bank to hold the OCR. “That would [have been] shocking,” said Gareth Kiernan, chief forecaster at Infometrics.

Kiwibank chief economist Jarrod Kerr said that a 0.25 percentage point rise would stop the banks from pushing interest rates much higher.

“A rise of 0.5 percentage points would have been a real signal that the Reserve Bank was behind the curve and would have suggested that things had run away from them.”

Valocity head of valuation James Wilson: “Are you buying now because you're able and want to?” Photo / Fiona Goodall

Goodall said that the Government’s announcement this week around support for businesses might have made a 0.5% increase more palatable, but in the end it wasn’t to be. The risk of the higher rise was that consumers stopped spending as they saw their property values drop, piling more pain onto businesses.

Rise already priced in

Kerr said some borrowers would see their interest rates go up, but mostly an OCR rise had already been priced in to mortgage rates.

It’s not unusual for mortgage lenders to predict OCR rises and price them into their rates in advance, but those on variable rates – 10% of mortgage-holders - would see their rates go up as a direct result of today’s decision.

Goodall said another 50% mortgage holders were due to roll over this year and they too would see their rates increase when that happens.

A 1.5% rise in mortgage interest rates would cost about $40 per fortnight per $100,000 of debt.

For example, an Aucklander who bought before October last year and had a $720,000 mortgage would pay between $270 and $310 more per fortnight when they refix on the new rates.

"We need to be careful as many people split their mortgage over different terms/rates so this is probably a worst-case scenario,” Goodall said.

The respective figures for Wellington, (mortgage $640,000) and Christchurch (mortgage $400,000) would be $240 to $275 more per fortnight and $150 to $175 more.

Housing market already cooling

One of the reasons the 0.25% rise had been most likely, Wilson said, was that the housing market was already cooling. "The cooling gave the Reserve Bank enough of a signal to sit back and see if it's going to become the trend. Therefore, a 0.5 percentage point increase might have been a wee bit aggressive considering other impacts on the cost of borrowing.”

CoreLogic head of research Nick Goodall says buyers may need to check their pre-approval status. Photo / Supplied

Some buyers may retreat from the market on the back of the OCR move. “It's more important than ever now to understand why you're making that that next purchase,” Wilson said. “Think long term and what the impacts on your overall lifestyle might be if you do commit to a large mortgage at the moment.

“Are you buying now because you're able and want to, or are you buying, because there is pressure on you to buy? And if so, what does the OCR rise mean for your affordability over the over the long-term period?”

Mortgage stress unlikely

Kiernan doesn’t believe the OCR rise will have a huge impact on mortgage-holders ability to service their debts. “We know that even when the mortgage rates were 2.2%, banks were basing their lending decisions on an applicant’s ability to repay at 6%”

“Yes, there will be a squeeze on people, particularly people who have bought into the housing market over the last 18 months at very high prices. They may feel uncomfortable and have to pare back some of their discretionary spending. But as long as they keep their jobs, they'll be fine. You’ve got to look at the labour market at the moment and go, ‘Well, nobody's going to be losing their job’.”