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Rate Review Time

With a 90% chance the OCR will increase at next review ‘now’s good’ for a rate check, says Kris Pedersen.

By: Kris Pedersen

1 August 2021

As little as a month ago many economists were predicting that it would be mid to late next year before we saw the Reserve Bank raise the official cash rate (OCR). This situation has rapidly changed with the market now pricing in a 90% chance that the rate will increase at the next review date, which is August 18. If this happens it will be the first increase the market has seen since 2014.

Inflation has jumped to a much higher level than had been expected and is now the highest it has been for 10 years with new house building cost inflation the highest since 1987.

Banks have quickly moved as per the table on this page with interest rate rises across the board. While the longer-term rates had been trending up courtesy of events happening overseas (and in particular the US) the short-term rates had been expected to stay low. This hope has quickly vanished with the one year rate, which had been a favourite across the market, jumping on the back of the expected OCR increase.

The Reserve Bank has also signalled an end to the Large Scale Asset Purchase (basically money printing) programme, with this finishing on July 23. They had been doing this as a strategy on the back of Covid to put downward pressure on interest rates, but realise now that they do not need the same level of stimulation with the economy being stronger than expected.

There are also further dark clouds on the horizon, with the increased capital requirements being imposed in July next year, which are also expected to result in pushing interest rates up. This change had been held off because of the pandemic and was originally meant to be implemented in July this year.

Savvy investors who would like more leverage may want to look at non-bank lender Select Home Loans. They can lend above the 60% LVR threshold that banks are limited to on existing investment properties. At 70% LVR their current rate in the two to five year bracket on their prime product is roughly the same as what banks are offering.

With many more investors looking at new build opportunities on the back of the change to interest deductibility, ANZ has also come to the party, copying ASB’s release of a product targeting this area and beating ASB with a floating rate of 1.68%. This rate will naturally move up if, as expected, the OCR does increase next month. However, this will still be a lot cheaper than standard floating rate offerings.

Another point to keep an eye on is what banks decide to do in regards to their test rates. These are the rates that banks use to determine a borrower’s maximum level of debt they can obtain. Naturally if they move these up borrowing capacity decreases. Because of this risk right now is the time to look at reviewing options such as interest only and other parts of how mortgages are structured.

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