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Interest Rates Troughed?

Interest rates are at record lows and globally we are seeing an easing bias - Rachael Alexander discusses how this will impact the local ending environment

By: Rachael Alexander

1 August 2019

The Reserve Bank of New Zealand (RBNZ) held the Official Cash Rate (OCR) at 1.5% during its recent announcement however, they did note that a lower OCR may be needed over time. Given inflation remains very low it is unlikely that interest rates will move up for quite some-time. All indications are for more downward pressure on the OCR.

We are also seeing an easing bias all over the world. The global outlook continues to deteriorate with Central Banks lining up to add stimulus.

Across the Tasman the Reserve Bank of Australia (RBA) cut their cash rate to a historic low of 1% and has admitted that the door is open for further cuts. The RBA remains worried about the jobs market and lack of wage growth.

During the month, in Australia, APRA announced changes to the minimum interest rate that banks can use when determining whether a borrower can meet their debt servicing requirements. The rate commonly used was 7.25% however, now APRA has changed the policy to allow banks to use a rate 2.5% above the actual customer interest rate. So, if for example the customers actual interest rate was 4.32%, then the interest rate used to determine whether a customer can meet their debt servicing requirements would be set at 6.82%.

The above policy change is interesting because there are thoughts that it may come across here to NZ. If it does, it would most likely open-up opportunities for more borrowers to meet serviceability requirements and therefore more customers having their finance approved. It will also mean that customers who were able to be approved at for example 7.25% rates would now be able to be approved for higher borrowings due to the interest component in the serviceability calculation now being at a lower level.

However, on the other hand, we are also seeing movements for requirements for banks to hold more capital. In Australia, APRA also announced that it will make ANZ, NAB and Westpac each hold an extra A$500million to reflect higher operational risk.

In NZ the Reserve Bank continues to work through the proposal for banks to have 45 to hold $20 billion more in capital under cash – this is effectively double the current minimum amount. The RBNZ is expected to make its final decision in November.

The four big banks are pushing back against the proposed increase in capital and indicating that interest rates could go up by as much as 1% under the plans. So, although there is downwards pressure on interest rates, and the minimum interest rate used to determine debt serviceability may lower, the increase in capital requirements may put a cap on how rates will go.

It’s worthwhile shopping around for the best rate or working with a mortgage adviser to negotiate on your behalf.

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