You are probably sick of seeing news article after news article announcing that the Reserve Bank has raised the OCR again.

After all, what is the OCR and what does it have to do with steadily climbing mortgage rates?

Let’s look into the answers to those questions now and take a peek at what’s happened in the world of home loans in the last month.

What Is The OCR?

OCR stands for Official Cash Rate. The Official Cash Rate is the interest rate that the Reserve Bank of New Zealand sets to influence monetary policy in the country. The OCR is the rate at which the Reserve Bank lends money to commercial banks. Therefore, it affects the interest rates that banks charge to borrowers and pay to savers.

The Reserve Bank reviews and sets the OCR periodically, typically every six weeks. The OCR is used to control inflation, stabilise the exchange rate, and support economic growth. When inflation is high, the Reserve Bank may increase the OCR to reduce demand and slow down the economy, and when inflation is low, the Reserve Bank may lower the OCR to stimulate demand and boost economic activity.

Why Does The Reserve Bank Keep Raising The OCR?

The Reserve Bank may raise the OCR for several reasons, but the most common is to control inflation. When the economy is growing strongly and demand for goods and services is high, there is upward pressure on prices. If inflation starts to rise above the RBNZ’s target range of 1-3%, the RBNZ may raise the OCR to reduce demand, cool the economy, and bring inflation back to the target range.

Inflation is currently sitting at 7.2% in New Zealand.

Kelleher, ANZ’s Managing Director for personal banking, says high inflation hurts people’s spending power, devalues their savings, and increases business costs, pushing up the cost of living.

“With this in mind, it is understandable the Reserve Bank is strongly hiking the OCR in an attempt to dampen inflation.” [source]

This is one of the main reasons that you see regular notifications that the OCR has been raised and that mortgage rates have been increasing so markedly.

Will The OCR Continue To Rise?

On 5th April 2023, the Reserve Bank surprised economists throughout the country by raising the OCR by 50 basis points to 5.25%. So, will it continue to rise?

“The RBNZ has given little away about what’s next for the OCR, but Davidson, Core Logic chief property economist, says it seems that there will be one more 0.25% rise on May 24, with the tightening cycle potentially ending there.

“That said, it’s still too early to sound the all-clear and suddenly expect housing sales volumes to pick up and house prices to find a floor,” he says.

“After all, new borrowers are still facing tough serviceability testing and a continued wave of existing mortgages are yet to be repriced to current rates of around 6.5%.”

He says these will remain challenges for the housing market for a few months yet – especially with the RBNZ wanting to emphasise that they’re not about to ‘go soft’ on inflation and suddenly lower the OCR anytime soon.” [source]

So, at this point, it looks likely that the OCR will rise again, but hopefully not at the rapid rate that it has risen in the last 12 months. If you have any questions about how these rises impact your current or potential borrowing, then it’s time to have a chat with a trusted mortgage advisor, like the team here at Mortgage Suite.

What’s Happening Currently?

OCR Rise

As we just discussed, the OCR rose to 5.25% on 5th April 2023. This will have an impact on interest rates. ANZ is the first of the big banks to announce increases to both their mortgage rates and their savings rates. [source]

DTI Restrictions

While not yet confirmed, it’s looking likely that Debt-To-Income restrictions will become a formal tool used when considering residential mortgage lending from March next year. If introduced, they are unlikely to have a huge impact as risky lending has already been reduced. Plus, the recent interest rate rises and dropping house prices have meant people haven’t been borrowing as much anyway. [source]

But, it is helpful to know that DTI restrictions will likely come into place and to be mindful of them when considering your borrowing power.

Dropping House Values

The latest QV House Price Index data shows that house values have made their biggest first-quarter fall in more than 15 years. Since the beginning of last year, average house values have dropped by more than $250,000 in Auckland and Wellington. And it looks like they are set to fall further still.

But, it’s not all bad news. According to QV national spokesperson Simon Petersen, “Some economists are predicting interest rates could be close to peaking. With increasing migration into the country only expected to increase demand for residential property, we might see the downturn bottom out later in the year, but there’s still so much uncertainty.” [source]

So, it will be a case of watching to see what happens in the property market and taking advice about your individual situation. If you have mortgage rates coming up for renewal, are considering buying or selling, or would simply like some general advice about where you stand financially, contact the friendly team at Mortgage Suite today.

We hope you enjoy the reads this month. If you want to stay up to date with everything we have going on let’s stay connected on Facebook, LinkedIn and our Mortgage Suite website. If you want to chat about anything Mortgage or interest rate related, please feel free to get in touch.