Last week the Reserve Bank made an OCR cut moving the Official Cash Rate (OCR) down by 0.50%, meaning the OCR is now down to 2.50% and that has also seen the banks reducing the home loan rates.
While an OCR cut was widely expected, many people were thinking it was going to be just 0.25% with a few hopeful that it might be 0.50%. The bigger cut is good news for anyone that has borrowed money (businesses and home owners etc) or for those that are considering borrowing money.
Most importantly the size of the drop has sent a clear signal about the Bank’s intentions for the New Zealand economy.
This OCR Cut is Important
Kiwis must know that there have been ongoing concerns about the economy’s sluggish performance.
Most of us will remember being told that 2025 would be the year that we will see our economy recover. The talk in 2024 was that we just needed to wait for 2025 and the recovery – we waited and are still waiting!
It seems that the Reserve Bank has been more concerned about inflation and that is understandable as that is the mandate that they work to. The Reserve Bank has the Official Cash Rate (OCR) as a tool to achieve and maintain price stability and to keep prices stable.
The Government has set them an inflation target between 1% and 3% over the medium term with a focus on the 2% midpoint and they have been so focused on this inflation target that they have seemingly ignored the wider impacts that this approach has had to the economy.
The good news with this October OCR cut is it now appears that they have accepted that inflation is under control and can therefore now turn the attention back to the economy.
How Will The OCR Impact Home Owners?
The key is that the OCR cut will flow through to lower home loan interest rates, and we have already started to see that.
If your loans are on floating rates then these lower rates will be immediate and hopefully you have already seen that. If you are on a fixed rate then you may need to wait for a while until your loan comes up to being refixed and then you will start to see the benefit.
Kiwi Edition is constantly watching what happens in the New Zealand financial markets and in our opinion these lower rates have come at the right time with the economy just starting to see some positive activity, but really needing a bit of a kick to get it moving. As we have Christmas fast approaching the kick might see Kiwis have a more enjoyable summer break when they have a few spare dollars to spend.
We would expect that this should kick start the property market and therefore we should see house prices start to increase again. There are a lot of Kiwis that have seen the value of their home drop over the last couple of years and so even a small increase will be a welcome sight for them. Increasing house prices give home owners more opportunity to consolidate debts or even sell and still have equity to buy another property.
House price increases might not be such a welcome sight for first home buyers and might mean they need to start looking at ways to enter the property market sooner – before house prices increase too much. This might mean using low deposit home loans, seeing if family can help boost your deposit or looking at shared home ownership options.
Should You Refix Now At Today’s Rates?
This is a question that a lot of Kiwis have, and while many people have ideas nobody can really predict what is going to happen. At the moment you have some economists saying this might be as low as the rates go, but others say we could expect more rate cuts.
Whatever you decide there are a few things that you you should consider:
- Have you reviewed your lending to ensure that you are with the best bank?
- If you can refix at a lower rate then do you plan to keep the repayments the same and pay the loan off more quickly?
- Do you have the mortgage structured into more than one loan?
- When are your other loans due to come off fixed
We have seen the banks cut since the OCR cut, but expect that the banks may still need to work out if they can cut more and especially with the fixed rates. This often happens in the days and weeks after an OCR cut when the wholesale markets have settled again, so at this stage it’s still a wait and see.
There is also talk that there could still be another OCR cut in November, but we would suggest that you do not rely on another OCR cut and instead think more about reverting to a long-term mortgage strategy now.
There is also now a real risk now is that if the economy picks up faster than expected. After all that’s what everyone really wants, but then we might start to see inflation increasing and maybe the Reserve Bank will look at increasing the OCR. It’s a real balancing act and we can only hope that the Reserve Bank and Government manage both the OCR and economy well so we can avoid any major shocks.
As always, have a chat to your mortgage adviser and they can discuss how the OCR cut might affect you and can answer your questions too.
