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How the OCR rises will affect the property market
The RBNZ lifted the OCR for the first time since 2014, what does this mean for homeowners and aspirational buyers?30 November 2021
The RBNZ is anticipating that OCR rates, currently at 0.75%, will be around 2.5% by late 2023, which is a relatively gentle rise. In response to the OCR changes so far, CoreLogic reports that most shorter term mortgage fixed-term interest rates are pushing up towards 4% or above, double the previous lows, and it says mortgage rates of 5% or more wouldn’t be a surprise over the next 6 to 12 months.
In 2020, during the Covid-19 outbreak, homeowners were being advised to take one year term mortgages because there was a chance interest rates could go even lower. Now in the rising interest rate environment in the final quarter of 2021, the most common mortgage term homeowners are taking is in the two to three year range.
The OCR rises, an anti-inflationary step by the RBNZ, aren’t happening in isolation. At the same time, credit is tightening among the big banks and they’re being more picky about who they give mortgages to, Loan to Value Ratio constraints are taking effect, and some banks are already beginning to use debt- to-income lending limits (a measure of debt serviceability) although the RBNZ hasn’t made a decision on these yet.
The arrival of a new Covid variant, Omicron, which little is known about, is a good reason for the RBNZ Governor, Adrian Orr, to be measured with his interest rate rises, say economic commentators.
Interest rates may be increasing at the moment but they may fall again as is normal with economic cycles, says independent economist, Tony Alexander, whose forecasting rates may lower again in 2024, if inflation has come right.
“They’re not going to go back to where we’ve had them the last six months though because we’re not going to hopefully be dealing with a global crisis,” he adds.
Normality is returning, there’s a strong labour market, a growing economy and there’s still a good outlook for the economy, he says.
As mortgage rates go up, people will have to cut back on coffees and eating out, says Tony, but the majority of borrowers will be able to service their mortgages. “We’ve been here before,” he explains.
What does an interest rate hike do to your weekly payments? According to Loan Market Central mortgage adviser, Cameron Marcroft, if your mortgage is $700,000, and a series of interest rate rises takes your mortgage interest rate from 3.5% to 5%, it will take your weekly payments from $724 a week to $866 a week. So it will definitely dig into your disposable income. Of course, if you were renting, your landlord will put that up year on year too, and the value of your home might well have gone up in value, so you may be gaining in other areas.
The silver lining to rising interest rates if you’re saving for your next home
Kelvin Davidson, chief property economist at CoreLogic points out that rising interest rates can help those saving for a home because they will accrue more interest on their savings.
Rising interest rates are harder on those with big mortgages and no savings, he says, and there will be some who find the going a bit tough in the coming months. But your mortgage should still be affordable if your original loan has been done right. When considering the loan, lenders will typically reassure themselves that you can not only pay the agreed mortgage rate but an extra 3% on top and still be living comfortably.
Now's the time to look at term deposit and term investment options to maximise returns.
Hedge your bets, split your mortgage
Wellington-based Loan Market mortgage adviser, Craig Pope says quite often he’ll help clients with a mix of short-term and long-term loans when the time comes to re-fix, so they hedge their bets.
“I tell people, It’s about the little decisions you make over a long period of time, it’s not set in stone for the rest of the mortgage,” he says.
At the same time, everyone is finding it tougher to get mortgages, whether you’re closer to retirement, or if you’re self-employed and might not have up-to-date financials, says Craig. There are generally more questions from lenders to home buyers at the moment and you should expect this.
“We’re trying to get punters to adjust to that and provide information and have as many records together as possible,” says the mortgage adviser.
Focus on what you can control
Loan Market Central’s Cameron Marcroft says in an environment of rising interest rates, he talks to homeowners and buyers about working on things they can control, such as debt reduction. If you’re heavily focused on reducing debt then when rates rise it’s a hit but not as bad as it could be, he says.
Homeowners can use products like revolving credit and offset loans to help with this, says Cameron who works with clients to set financial goals each year and achieve debt reduction annually.
Some people set and forget, grab a rate and think, ‘Job done’, he says. “You’ve got to have a game plan behind your structure. Be a bit more strategic about reducing debt.”
The mortgage adviser will sometimes help clients complement a longer-term loan with a one-year for flexibility, in situations where there might be lump sum repayment coming in.
Always think long-term in an environment of rising interest rates to manage risk.
Managing your risk
Martin Hawes, chair of the Summer KiwiSaver Investment Committee and finance author says the most important thing to think about when next fixing your mortgage term is to consider managing risk.
When looking at a mortgage term, it’s more about what risk can you afford to take, he says. If you’re considering fixing for three years at a certain rate and you could survive that, it’s best to do it, he says. Any attempts to try and second guess the markets are unlikely to get you far, he adds.
Some homeowners took five-year term mortgages last year but fixing on a five-year term in late 2021 is more expensive now and it could be too long a period, says Martin. “The chances of you selling within five years is quite high,” he explains.
When deciding what term mortgage and how much borrowing you can afford, you need to ask yourself some key questions, such as: ‘What if one of us lost a job, or if one of the children became ill, or what if a whole new virus appears on the scene?’” says Martin
While the job market may seem very strong in New Zealand giving homeowners confidence, the job market can “change on a dime,” says the finance writer.
Decline of FOMO buyers
Meanwhile, another positive consequence of rising interest rates is that house hunters primarily driven by FOMO in their property search have stepped back in recent months and Tony Alexander is projecting they will strongly diminish during 2022.
For serious buyers, rising interest rates won’t necessarily change their mindset to buy, people still want to secure their future, adds Kelvin.
At this point, interest rate rises are still slow and steady and your income has probably gone up at the same time, so there are mitigating circumstances, says the CoreLogic chief economist.