What are the Current Home Loan Mortgage Interest Rates after the OCR Decrease?

Currently we are seeing rates for housing loans in New Zealand for mortgage borrowers ranging from 6.55% for 12-months to 7.65%. 5-year rates range from 5.69% to 6.89%. Below are the latest numbers as of August 20^th 2024. These rates are predicted to fall again by the end of 2024, therefore re-fixing for a short period could be a good option for home owners and investors.

What is the OCR (Official Cash Rate)?

The OCR, or Official Cash Rate, is the interest rate set by the RBNZ. It affects the interest rates on mortgages and savings accounts. When the OCR goes down, mortgage and home loan rates usually fall. This makes it cheaper to borrow money to buy a house. However, this reduction will also cause a fall in savings, like term deposits (TDs). Savers may earn less interest on their deposits.

Why did the RBNZ cut the OCR?

Recently, New Zealand’s economy hasn’t been doing too well. Economic data from various sectors has shown signs of weakness, which has led the RBNZ to lower the OCR. The RBNZ hopes to boost the economy by cutting the OCR and the cost of money. It should make it easier for people to spend and for businesses to invest.

One of the key reasons behind this decision is the low level of inflation. Inflation measures how much prices are going up over time. The RBNZ aims to keep inflation between 1% and 3%, and it is nearing the 3% mark, which means inflation is under control. The RBNZ is lowering the OCR. This will boost spending and ease pressure on households and businesses.

Another factor is the rising unemployment rate, which hit 4.6% in the June 2024 quarter. As unemployment rises, individuals are spending less money, which is causing a further slowdown in the economy. The RBNZ cut the OCR to help the job market recover. It hopes cheaper borrowing will let businesses invest and hire more workers.

Ideally, the New Zealand economy will steady. The OCR will then return to a “neutral” position, which is 3%. This rate neither stimulates nor suppresses the economy. We can then expect interest rates to stabilise within the 4.5%-5% range.

What Does This Mean for Mortgage Borrowers?

For those with a mortgage, the OCR cut is good news. As mortgage interest rates drop, homeowners will see their monthly payments decrease. For a $600,000 mortgage over 30 years, a drop in the interest rate from 7.15% to 5.99% could save you about $459 a month. That money can go to other expenses, savings, or paying off your mortgage faster.

While these savings may not seem huge, every bit helps, especially after a couple of tough years of high-interest rates. If you keep paying the higher amount at 7.15% after the rate drops to 5.99%, you could pay off your 30-year mortgage in about 22.5 years. This would reduce your mortgage term by about 7 years and 6 months.

What About the New Zealand Economy?

In the short term, the OCR cut is likely to have a limited impact on the economy. When interest rates were first raised, it took a while to feel the effects. Many people had savings to fall back on or had fixed their home loans when rates were historically low. With savings gone and fixed mortgage terms expiring, people have cut back on spending. This has contributed to the current economic slowdown.

As interest rates fall, it will take time for people to recover from the high costs of recent years. People generally spend the extra money from lower mortgage repayments on essentials and delayed purchases, and then towards rebuilding savings. Moving to another bank may be an option for some New Zealand households. This can often be a rebound for their experience of their current bank and how they were treated when rates were high, and relief wasn’t granted.  

Global Factors at Play

It’s not only New Zealand that’s facing economic challenges. Other countries, including China and the US, have economic issues too. As New Zealand’s largest trading partner, China’s economic struggles could impact our recovery. The mixed signals from the US economy add to the uncertainty about the global outlook. So do the 2024 US Presidential Elections. The Australian Reserve Bank reported their economy is also soft with growth only recorded at 0.1% in the first quarter of 2024.

What Does This Mean for the Housing Market?

The housing market in New Zealand has been slow recently. Many new listings have appeared. But, fewer buyers want to buy. High interest rates and job worries are to blame. As a result, house prices have started to fall. It’s not hard to find a new-build development in Auckland with many for-sale signs out front. The return of interest deductibility for landlords and property investors in New Zealand from April 2024 has not yet led to a flurry of investor activity.

The OCR cut and lower mortgage rates may stabilise the housing market. Lower monthly mortgage repayments may boost affordability. This could encourage more buyers to enter the market and support house price growth. Most economic forecasters agree that house prices won’t decline any more. We shouldn’t expect the housing market to take off. But house prices may gradually recover over the next year.

The real turning point will come when banks lower their test rates, or loan serviceability rates. These are the rates that determine if borrowers can afford their mortgage repayments. They apply to a new mortgage application or your current loan if you want to top up or refinance your home loan. Currently, these test rates are around 9%, which is quite high given the new lower OCR. Once these test rates come down, likely in 3-6 months, more people may be able to borrow enough to buy their desired homes. With the introduction of DTI rules in July 2024, a 9% test rate is looking unrealistic at present.

Conclusion

The recent OCR cut by the RBNZ is a welcome change for mortgage borrowers. It offers some relief after years of high-interest rates. The economy and housing market may be only slightly affected. But, this move sets the stage for a slow recovery. Lower mortgage payments may boost the property market as affordability improves. Homeowners can look forward to this. However, with global economic challenges still looming, it’s important to keep an eye on further developments.