In late May, the Reserve Bank of New Zealand (RBNZ) increased the Official Cash Rate (OCR) to 2% from 1.5% – the second 0.5% increase in a row. And it now expects the OCR to peak at 3.9% by June next year, to try and curb rampant inflation.
If you have a mortgage, here’s what this may mean for you.
How the OCR affects mortgage interest rates
As you may know, the Official Cash Rate is a tool that the RBNZ can use to influence the cost of borrowing money in New Zealand, and therefore the level of economic activity and inflation.
In short, the Reserve Bank acts as the central bank for registered banks in New Zealand, either paying or charging interest to banks who either have excess funds (deposits) or need funds (borrowing) after all their overnight payments have been processed. Then, when setting interest rates for their own customers, those banks add a margin (to make a return, like a profit) to the rate they pay the RBNZ. And while the OCR isn’t the only factor affecting retail mortgage rates, it is a significant one.
Why RBNZ is lifting the OCR
After years of lower-than-ever interest rates, the current extreme inflationary environment has seen the Reserve Bank lift the official cash rate by 1.5% in just seven months. It now sits at 2%, a level unseen since mid-2016.
According to a note published by the RBNZ, the Monetary Policy Committee plans to continue to use OCR hikes to maintain price stability and ensure that consumer price inflation returns to within the 1 to 3% target range (from the current 6.9%). This means that more aggressive interest rate hikes are on the cards.
So, how high may the OCR go? The central bank currently sees the OCR peaking at 3.9% by June 2023, 0.5% than previously expected. In fact, the RBNZ now forecast the OCR to hit 3.5% by as soon as this December.
What does it mean for mortgage holders?
With the OCR now at its highest level since September 2016 and more increases likely on the way, the pressure is high on mortgage rates. So far, most floating rates have already swelled, as did short-term rates. To give you an idea of the extent of the increase, some two-year fixed rates were offered at 2.5% in June 2021 but are now well over 5%.
So, if you have a fixed-term mortgage rate that’s due to expire soon, it’s important to think about your next move: namely, whether to refix, and if so, for how long.
At the moment, the OCR yearly average projection for 2023 is 2.9%, 3.9% in 2024 and 3.8% in 2025. After that, if supply and demand “are more in balance”, the Reserve Bank may cut the OCR again.
Questioning these forecasts, some economists expect the cash rate to hit 3% around November, but believe it will stop around there to avoid exacerbating the cost-of-living crisis. Even so, according to Kiwibank economists, mortgage rates will likely lift to between 6% and 7.5% in the coming year.
Of course, there’s no crystal ball here and it’s not yet clear how accurate these predictions are, or what the actual impact on mortgage rates might be. The key thing is to consider your needs and goals. For example, if you’re planning to sell your house in the near future, a shorter-term fixed rate may be an appropriate option. Otherwise, you may want to refix your mortgage rate for a longer term, to achieve certainty of budgeting. Your unique circumstances are all that matter.
Need help?
Get in touch. While we can’t tell you for sure where home loan rates are headed next, as mortgage advisers we can help you find a mortgage structure that’s suitable for your goals.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.