On the 13th July the Reserve Bank (RBNZ) has reviewed our Official Cash Rate (OCR) and has increased it by another 0.50% from 2.0% to 2.5%. The OCR has been our primary monetary policy tool in NZ to assist the RBNZ in meeting their mandate to control inflation, which is currently significantly higher than their targeted 1-3%.
The OCR is the interest rate for overnight transactions between banks, which affects the wholesale price of borrowed money. As a result, this directly affects commercial banks and in turn affects the price in which we (as retail mortgage borrowers) borrow money. In general, the higher the OCR, the higher our interest rates.
The last time our OCR was at this level was in early 2016, and economists are expecting it to reach it’s peak later this year or early next year, at around 3.5%-4%.
Monetary Policy is important because it directly influences our economy, by influencing the decisions that businesses and individuals make on terms of investment and consumer spending.
It is important that in a rising interest rate environment you as a borrower review your current rates and get an understanding of when the fixed rate expires, and what your new payments could be (either on a higher interest rate, or on a principal and interest mortgage (if you’re on interest only and your interest only term is about to end), or even a combination of both – which could be quite difficult from a cashflow perspective.
In addition to this, there are differences in interest rates that some banks are offering when comparing with others, and there are also in come cases high cash contributions from banks (up to 1% of the loan amount in some cases). With such a large cash contribution, you could be looking at several thousands of dollars for moving banks. For example on an $800,000 mortgage this could be as much as $8,000 in cash. Once you’ve paid your solicitor’s bill for switching banks you’re still likely to end up with surplus cash in your back pocket.
When adding interest rate differences and cash contributions, this could be the difference between whether or not to stay with your existing bank, or look elsewhere. This sort of incentive from banks won’t last long, so we would need to have an application submitted for you within the next few weeks – which means you’ll need all documents submitted to us quickly.
At KPM we are encouraging our clients to review their mortgages and get in touch if they have any concerns or questions about their mortgage. It is always better to front-foot any changes such as this, particularly if interest rates could be higher later this year.
For any further questions about your own situation, please get in touch with us.