The OCR announcement – what do rising interest rates mean for you?

 

The Reserve Bank of New Zealand (RBNZ) are trying to force a recession to combat increasing inflation.  At the end of November, they raised the Official Cash Rate (OCR) – the biggest increase they’ve ever done: a .75% increase.

 

So, what is the OCR?

Essentially it is a benchmark interest rate in New Zealand, and influences the price of borrowing money i.e. home loan interest rates / repayments.  The Reserve Bank (RBNZ) use the OCR as a ‘tool’ to maintain price stability, influence the level of economic activity and inflation and support maximum employment.

 

What does this mean for you?

The RBNZ are trying to decrease inflation, so why should you care?  The effect of inflation can be seen in rising fuel and food prices.  They are using the OCR as a tool to hopefully bring these prices down.

 

If you have a floating rate home loan, you may already see the flow-on effects in your home loan repayments increasing slightly.

 

Those who had fixed their home loans to include longer term fixed rates when the OCR was at 0.25% in 2020 would now be saving a lot of money, and those on floating rates or shorter-term fixed rates up for renewal would be feeling the effects as those rates drift up with the OCR.

 

What does the future look like?

In our opinion, we will likely see fixed rates reach 7%+ later in the year…

 

Most economists are predicting interest rate rises throughout 2023, and a couple have indicated they feel these will only start to taper back in around 18 months to 2 years’ time. It is however important to remember that these are only predictions and shouldn’t be considered as financial advice.

 

Worried about running into affordability issues?

If you’re worried about a fixed rate coming up for renewal in 2023 and what impact increased repayments will have on your budget, there are ways to help absorb this increase.

 

You should review your existing loan structure to see if it would be beneficial to break the rate earlier to lock in a longer-term rate ahead of any potential rate rises.

 

You can also review the total loan term to see if this could be extended out in order to reduce the minimum repayments.  It is important to realise this does mean you will pay more in interest over the life of your loan, but it could give you a breather for a period of time, and you can always revisit increasing your repayments again in the future when your budget allows this.

 

If you have any personal debt like credit cards or car loans, it might be worth topping up with your current home loan provider to consolidate this debt to put more money in your pocket each payday.  It is great for the affordability point, but again, it is important to realise if you take a short-term debt and put it over a much longer term at a lower interest rate, you may pay more in interest over the total loan term.

 

Are you with the right bank?

You can consider switching your home loan to a new bank if they are offering lower interest rates than your current bank.  The new bank may also have additional loan products that better suit your needs and potentially reduce the amount of interest you pay.

 

Keep in mind that your existing bank will not tell you about other loan products in the market that they do not have to offer you.

 

If you’ve accepted cash incentives from your current lender at the time of when you took out your home loan but want to switch to another bank for a better deal, the bank will often ask you to pay this back.  This is called a cash claw-back and it incentivises borrowers to stay with their current lender. Check and see whether you’re under any kind of cash claw-back period first.

 

Holding savings?  Or are you expecting money to come in over the next 12 months?  If yes, you might want to restructure your home loan to take advantage of this.

 

We help people find the right financial solution with a focus on making it easy. Not everyone’s situation is the same.

 

Connect Me understand these rate increases can cause financial and emotional stress when budgets are already tight with increasing costs of living.

 

We will review your financial position with empathy and keeping you at the heart of any advice given and decisions implemented. You just need to ask the right people…

 

Give us a call on 📞 0508 4 CONNECT if you would like some free guidance on how to navigate these changes.