ANALYSIS: Not since its inception in 1999 has the Official Cash Rate (OCR) in New Zealand increased by 50 basis points in two consecutive announcements. As of May 25 2022, that record has now been broken with more hikes - potentially even 50 basis point hikes - possible later this year. The question on every homeowner's lips (or keyboard), therefore, is likely to be: how will this affect my mortgage or a mortgage I intend to get?
The good news is that the majority of the interest rate pain is already baked in. Economists are forecasting two-year interest rates to be stretching towards 6% by end of 2022 and, given they are already hovering around 5%, that doesn’t represent as big a change as it does to those rolling off those ~2.2% interest rates from last year. A 0.5% increase in interest rates means ~$10 extra per week per $100k of borrowing.
In other words, mortgage interest rates are much higher now but the forecast isn’t for things to get significantly worse; having already gone up 3% in the past year, no one is picking another 3% this year. The best thing homeowners can do now is to tighten their belts (ie; stop spending, which is exactly what the Reserve Bank is trying to achieve) and focus on how they can pay their current higher interest rates.
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For those looking to purchase, the announcement from the Reserve Bank should have been a little bit of good news too. It didn’t largely change its forecast for the OCR - a forecast which, as mentioned above, is already baked into interest rates. There has been a lot of hesitancy in the market for buyers concerned about interest rates continuing their skyward trend and holding off purchasing as a result. Based on the Reserve Bank’s announcement, it seems likely that interest rates will max out around 6%-7% over the next couple of years. Quick-acting homebuyers who can stomach that level of home-loan rate may find some bargains out there at the moment if they jump in before the buyers return.
With the Official Cash Rate increasing, variable rates will inevitably increase quite quickly however unlike in the 2011-2013 era, when large portions of mortgages were on a floating rate, most mortgages are currently fixed. The statistic appears to be that around 19% of home loans are on a variable rate, having dropped by around 3% recently however this may be skewed by the ASB’s recent Back My Build and ANZ’s current Blueprint to Build schemes which offer(ed) incredibly discounted variable rates for buyers of new build properties.
Mortgage Lab founder Rupert Gough: "The best thing homeowners can do now is to tighten their belts." Photo / Fiona Goodall
It’s worth taking the time, if you do have a revolving credit, floating, or offset account as part of your mortgage, checking that the bank is applying a discount to that loan is a good use of time. Most mortgages under 80% LVR qualify for a significant discount (often 0.6% to 0.8%) from the advertised variable rate which can end up saving hundreds or even a few thousand dollars per year.
Rising interest rates are the original Reserve Bank tool to heat and cool the economy. In past years it has been more about cooling the property market but with Loan to Value Ratios and threats of Debt to Income ratios more commonly used to do this, the OCR is now more of a tool for inflation adjustments. However, the increased cost of mortgages is what stops people from spending and reduces inflation. Start belt-tightening now, try to get your mortgage payments up to where they will be at 6%-7% and you will be able to weather the next few years.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
