All Eyes On The OCR Rise
Ryan Smuts reports the jump in interest rates means less disposable income for property owners and a marked influence on the money cycle.
30 April 2022
The big talk in April in the interest rate market was the fact that the OCR was increased by 0.50 per cent, which has put us at 1.50 per cent. This is the first time in over two decades that the OCR has increased by more than 0.25 per cent in one review.
There is no doubt this will influence the interest rate market, with many banks already increasing their floating rates, and some also increasing their fixed rates. If you compare this month’s rates table with last month’s issue you’ll see quite a noticeable difference in interest rates offered.
The RBNZ currently has a role of trying to curb inflationary pressures while also trying not to go too far at the risk of having a detrimental effect on other parts of the economy, such as housing and employment. With the rising cost of goods for Kiwis, inflation is a great concern and certainly isn’t something that can be allowed to get out of control. However, with rising interest rates comes less disposable income for property owners (investors and home-owners) which will certainly have an influence on the money cycle.
The days of cheap interest rates in 2020 and 2021 are certainly behind us, and borrowers look to longer term rates to allow them to have more certainty on their future in this rising environment. Several commentators don’t expect this to be the last of the OCR increases, with many forecasts expecting the peak to be late 2023, nearer the 3 per cent mark.
On the construction side of lending, there were a few bank products (ASB and Sovereign’s Back My Build and ANZ’s Blueprint to Build) that were extremely attractive for those building homes or buying new-build properties. ASB officially ended its campaign for new approvals, and anything approved currently needs to be settled by July. ANZ’s product is still available, but I would imagine they, too, will end this shortly.
In the interest rate environment since Covid we saw many borrowers fixing only for 12 months, many of whom are still on lower short-term interest rates, the last of which ended in July 2021. Many of these borrowers will be coming off interest rates at circa 2.19 per cent, and now interest rates are higher it’s a concern how this may pan out.
Historically, Kiwis have tended to opt for a two-year fixed term as it is often a balance of some certainty at a reasonable price. If comparing this with the one-year rate they were used to (for example ANZ’s 5.15 per cent standard rate on their two- year offer) this is more than double their interest costs. On a $1,000,000 mortgage this is an increase in interest costs from $21,900 p/a to $51,500 ($29,600). Many Kiwis simply do not have an additional $569 p/w as disposable income to put into their mortgage.
As always we strongly recommend that borrowers review their situation now with a mortgage adviser and determine what may suit them best.