As Autumn rolls in and we continue to see more than gloomy weather!
As another predicted OCR rise comes into play, we are hearing about another round of mortgage rate increases. But, how much does the OCR really impact mortgage rates?
This month, we thought we’d explain some of the factors that contribute to how Lenders set their mortgage rates.
So, read on to find out more about that and a quick update on the March finance market.
How Do Banks Set Mortgage Rates?
When you take out a mortgage with a bank, you know that you are going to have to pay interest on the amount that is borrowed. But, have you ever wondered how that interest rate is calculated?
Rather than plucking a number out of thin air, there are a number of factors that contribute to that rate. These are the main ones:
Official Cash Rate
Lending institutions, like banks, cannot simply magic up money to lend to their customers. They need to source funds to lend out. These can come from a number of sources, but one of the main ones is NZ’s Reserve Bank. The official cash rate (OCR) is set by the Reserve Bank of NZ and is the fixed rate at which banks can borrow capital.
The OCR is reviewed periodically by the Reserve Bank to ensure it is set at the correct rate for the current economic climate. So, changes in the OCR can influence mortgage rates as they impact the cost your bank will need to pay for loan funding.
Funding Costs
The Reserve Bank is not the only place that your bank will source the funds to lend to their customers. They will also borrow money from term depositors and international money markets. Again, there are costs associated with this borrowing, which your bank will need to pass on to you as the customer. They recover these costs by building them into your mortgage interest rates.
Basically, the more it costs for banks to borrow capital, the higher your mortgage rates will become.
Competition
There are only so many mortgage customers out there, so lenders will compete for their business. This can have a positive impact on interest rates as banks may adjust those rates in response to what their competitors are doing in order to attract customers.
Economic Conditions
The overall economic state locally and globally can also impact interest rates. For example, NZ is currently experiencing a higher than average rate of inflation. The Reserve Bank is taking steps to raise the OCR in a bid to bring inflation back within the recommended range.
Other factors like global interest rates, global financial markets and political events can all impact mortgage rates. As can the economic climate of major trading partners like China, the USA and Australia.
Risk
Lenders will also assess the risk factor of lending to individual customers. They will assess your credit score, income and property value to determine whether you are a high or low risk customer. Customers with a higher risk profile might be offered higher mortgage rates to compensate for the increased risk the Lender takes on by lending funds to you.
Bank Costs
Whether we like it or not, banks operate as a business and have associated costs to factor in.
“These, and the other costs banks face, like paying staff wages, marketing to keep their brands in the public’s consciousness, renting premises, paying tax, hedging their interest rate and currency risks, and lobbying for bank-friendly laws, add up to banks’ cost of doing business, and it is all priced into what they charge for their home loans.” [
source]
As you can see, there are a number of factors that contribute to the interest rates you pay on your mortgage. They are not simply determined by the OCR, but it is a large contributing factor.
A Quick Update – March 2023
Cash Rate Rises Again
As expected, the Reserve Bank increased the official cash rate (OCR) on Feb 22,
bringing it to 4.75%. So, what does that mean for you as a mortgage holder?
We are all well aware that mortgage rates have increased from the 2% mark to the 6% mark in the last two years. But, are the mortgage rates going to increase further?
Well, they may do. But, it might not be by as much as you fear. Just because the cash rate has gone up by 50 basis points, it doesn’t mean that mortgage rates will immediately follow suit. We will likely see changes in the floating and one-year fixed rates, but longer term rates will probably not be as impacted.
If you are one of the 50% of mortgage holders whose rates are coming up for renewal this year, we strongly recommend taking advice on what is the best option for your circumstances. Have a chat with the friendly team at Mortgage Suite today.
Term Deposit Rates Rise
One of the positive aspects of mortgage rates increasing is the fact that interest rates generally rise also. So, if you have some savings, you can make them work better for you right now.
Term deposit rates are up.
Kiwibank is currently advertising rates of 5.49% interest for a 1 year term deposit (minimum investment of $10,000). The other big banks are also offering rates upwards of 5%.
These term deposit rates are significantly higher than what we have seen in recent years. It is worth considering as a low risk investment. But, if you have any queries about whether a term deposit is the right investment for you, speak with a trusted financial advisor first. The Mortgage Suite team are more than happy to help you establish how to make your money work better for you.
