We Are Still Climbing The Hill
The OCR is tipped to rise again in February and April 2023, which is likely to mean further increases to bank floating rates and the test rates they use, writes Ryan Smuts.
30 November 2022
Generally speaking, interest rates are still climbing, and at the time of writing our official cash rate is sitting at 3.50 per cent. The next OCR review is in a matter of days and there is a strong expectation from economists and pundits that we’ll see an increase of 0.75 per cent on November 25, which would be the largest increase to the OCR since it was introduced in 1999 – putting us up to 4.25 per cent.
It would also be the highest our OCR has been since January 2009. There are further expectations that the OCR will be increased again in February and April 2023, which would likely mean further increases to bank floating rates and the test rates they use to assess a borrower’s “affordability”.
In the current environment this would mean it is even harder for households and businesses to access credit.
When looking at mortgage interest rates currently, most banks’ floating rates are sitting in the 7 per cents, with fixed rates ranging from the high 5 per cents for one-year terms to the high 6 per cents for long-term fixed rates such as five years.
FLOATING AND SHORT-TERMS
One thing to be aware of is that while we expect to have rates increasing further for some terms (shorter term and floating) it is possible some other terms have had these costs priced in already.
As I’ve stated in the past, the OCR doesn’t always have a direct correlation to mortgage interest rates (particularly all terms), but in general it has most of an effect on floating and short-term fixed interest rates.
One piece of data released recently revealed the United States inflation number was better than expected. The annual inflation rate is still high, but interest rate markets have a lot to do with expectations and this has meant we have seen borrowing costs for New Zealand banks reduced slightly in some swap rates. However, these have not translated to lower mortgage borrowing costs for consumers.
Something that is becoming more of a concern for property investors is the interest deductibility changes that have progressively been taking effect more harshly as financial years roll on. Many investors haven’t taken a serious look into how this would change their cash flows, and with the rising costs of borrowing and large amounts of debt that investors sometimes carry, the impact of this could be higher than people think. It’s always worth thinking about this when reviewing your interest rates.
In many cases NZ banks are pricing better than the Australian banks, so certainly are seeing increased volumes of applications as a result.
Small differences in interest rates can mean huge savings over the long run, particularly if you structure your mortgage correctly.