The OCR is the benchmark interest rate set by the Reserve Bank of New Zealand (RBNZ) and serves as a tool to manage inflation and stabilize the economy. When the OCR increases, it becomes more expensive for banks to borrow money from the central bank, leading to a chain of effects that can affect mortgage rates for households.
Banks typically adjust their lending rates, including mortgage rates, in response to changes in the OCR. As the OCR rises, banks face higher borrowing costs, and to maintain profitability, they may increase the interest rates they charge on mortgages. This means that households with variable or floating-rate mortgages will likely experience an increase in their monthly mortgage payments.
Following yesterday’s decision, ASB was the first major bank to lift its interest rates. Its Housing Variable rate will move from 8.39 per cent to 8.64 per cent while the Orbit home loan rate will move from 8.49 per cent to 8.74 per cent.
Fixed-rate mortgages, on the other hand, are less directly impacted by OCR changes. These mortgages have a set interest rate for a specified period, typically ranging from one to five years. The interest rate on fixed-rate mortgages is determined by the market at the time of borrowing, and it remains unchanged throughout the fixed term. However, when the fixed term ends and it's time to renew the mortgage, the prevailing OCR and market conditions at that time will influence the new interest rate offered by the bank.
It's important to note that the OCR is not the sole factor determining mortgage rates. Banks consider various factors when setting their lending rates, such as funding costs, competition in the market, and overall economic conditions. Additionally, banks may have different lending strategies, which can result in variations in mortgage rates among different lenders.
The impact of OCR increases on household mortgage rates can affect borrowers' financial situations. Higher mortgage rates can increase the cost of homeownership and put pressure on household budgets. Homeowners with variable-rate mortgages may experience an immediate increase in their mortgage payments, which can impact their disposable income and financial stability.
However, it's also worth mentioning that higher OCR rates are often implemented by the RBNZ to curb inflationary pressures in the economy. In the long run, controlling inflation helps maintain the purchasing power of households and promotes overall economic stability. Therefore, while OCR increases may lead to short-term challenges for mortgage holders, they serve a broader economic purpose.
For individuals considering taking out a mortgage or renewing an existing one, it's advisable to closely monitor the OCR announcements and stay informed about market conditions. Seeking professional advice from mortgage brokers or financial advisors can provide valuable insights into the best options available and help navigate through potential interest rate fluctuations.
Overall, increases in the OCR can influence household mortgage rates in New Zealand, particularly for borrowers with variable-rate mortgages. Understanding these dynamics and planning accordingly can assist homeowners in managing their mortgage payments effectively.
All in all, mortgages or home loans and predicting the OCR is a tricky subject. Here at Money Compare we partner with leading mortgage brokers to help take the challenge out of the task and get the best possible mortgage for your circumstances. Request a call today.
