The Reserve Bank shocked lenders and borrowers alike with it’s big August Cash Rate cut sending the market into a spin and lenders scurrying to outdo each other on rates in a mortgage rate battle that could leave buyers with a smile on their face.
OCR Shock: the dust is still settling from the Reserve Banks shock 50 basis point (bps) cut to the Official Cash Rate (OCR) in early August. It was double what the market was expecting, such large cuts are rare and have usually followed major global or domestic events such as the 9/11 terrorists attacks, the GFC and after the Christchurch Earthquake. The Reserve Bank justified the cut because of slowing GDP growth and rising economic headwinds with the aim of keeping inflation within their target band of 1-3% and maintaining strong employment.
Rates: Borrowers would have been smiling at the size of the cut and the shock move caught lenders off guard. In the hours and days after the announcement there was a flurry of press releases and rate reductions. Floating rates moved first and furthest, while fixed rate reaction was a little more mixed with some banks making some smaller cuts and others leaving several key fixed rates as they were initially. As we moved past ground zero, lenders found their feet, more cuts followed and things have certainly become more competitive over the last few weeks. Also, for the first time in a few years lenders are dropping their assessment rates, some by as much as 0.80% which has a significant impact on how much you can borrow. The situation is fluid and we are keeping a very close eye on what’s on offer. If you’re trying to make sense of the various rate offers, please get in touch and I can provide a clear picture of where things stand daily and who has the sharpest pencil when it comes to cutting a deal.
Where to next for rates? Most commentators see business confidence remaining low, inflation sitting within its target band and ongoing global uncertainty around Trump’s trade war with China, meaning there will be continued downward pressure on the OCR and home loan rates. ASB chief economist Nick Tuffley was forecasting a further 25bp cut to 0.75%, in November, stating Global risks around US-China tensions and added Brexit uncertainty. However there are limits. New Zealand banks need to raise 75% of their funds domestically from deposits to lend back out to borrowers and that means they need to offer at least some sort of carrot to savers in the form of an interest rate. This is a bit of a hand brake on future interest rate falls.
What if I’m renting? It’s a bit of a mixed bag for renters. Rental increases, while still up year on year, fell month on month which could finally indicate a slowdown after years of steadily increasing rental prices. Lower interest rates provide an opportunity to make the jump into home ownership, but at the same time meager returns on savings will see deposit growth slow. The kiwi dollar dropping on the back of the OCR announcements won’t help with the cost of imported goods and services so buying power could decrease, making it harder to save also.
This article was supplied by Bruce Patten, a Loan Market mortgage broker since 2002 who has written over $1 Billion in home loans for his client and is considered one of the most experienced mortgage brokers in Auckland.
Bruce is always on hand to answer any questions you may have about loans or anything around the loan process. Get in touch with him anytime by phone (021 661 114) or email (firstname.lastname@example.org).