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The Pendulum Swings Back

The Pendulum Swings Back

The reduction in the OCR presents borrowers with opportunities, as Rachael Alexander explains.

By: Rachael Alexander

1 June 2019

As anticipated in last month’s column, the pendulum has shifted. The big news was the announcement by the Reserve Bank of NZ (RBNZ) to reduce the Official Cash Rate (OCR) by 25 basis points. This was the first time that the RBNZ has changed the OCR since November 2016.

It was a little disappointing to see that the level of cuts made by the main banks were only between four and 16 basis points meaning that the full OCR cut did not completely flow through to the retail interest rate that borrowers see in the marketplace. However, in saying that some banks had moved rates down prior to the cut as the market started to get ready for the anticipated May announcement.

The interest rate cuts were generally applied across both the floating rate and the one to three-year fixed rates. Not a lot of movement was seen on the five-year fixed rate.

Given that the actual cut in rates flowing through to borrowers were small, the relative saving in interest payments is small. As an example, if your mortgage is $500,000 – the differential of an interest rate cut of 10 basis points equates to only an interest savings of $500 a year or approximately $9.62 a week. Still, if you take this saving and aggregate it up to all mortgage holders in the marketplace, this equates to a reasonable amount of “extra” money in the system. Some borrowers may choose to spend or invest this extra money therefore providing some stimulus into the economy.

Alternatively, with some borrowers (particularly first-home owners trying to get into the market), the cut in interest rates could translate into either i) more buyers being approved for finance as the hurdle rate is lower and/or ii) an increase in borrowing capacity, as borrowers now have to pay less money in interest to service the loan.

If the entire interest rate savings translated into borrowers increasing their levels of borrowing, then in the above example of a $500,000 loan – this could translate into an increase in borrowing capacity to $511,390.

The ability for borrowers to be able to borrow more funds, could place some upward price pressure on property values – however, due to the interest savings being small any upward price pressure on property prices is also likely to be small – in the $500,000 example above, maybe in the region of around 2% at most. Hardly, anything to write home about. If anything, the cut in OCR is likely to help stabilise property prices.

Opportunities For Borrowers

An alternative, to using the “extra” cash from interest rate reductions for spending or investment would be to look at using the opportunity to maintain the current level of repayments and shorten the overall interest cost and term of existing loans. This helps continue build good budgeting habits should the pendulum start swinging the other way – albeit this doesn’t look like happening anytime soon.

Borrowers with good profiles continue to be in a position of strong negotiation. The two-year rate still presents value however, the three-year rate is now also in play. As always, it’s worthwhile shopping around for the best rate or working with a Mortgage Adviser to negotiate on your behalf.