For homeowners and prospective homebuyers, the state of the economy plays a crucial role in determining the affordability and accessibility of housing. One key factor that significantly influences the housing market is the Official Cash Rate (OCR).
But what exactly IS the Official Cash Rate and why does it have so much power over the property market?
The Official Cash Rate is the interest rate set by the Reserve Bank of New Zealand (RBNZ). It represents the rate at which commercial banks can borrow or lend money to the Reserve Bank on an overnight basis. The OCR is primarily used to regulate the country's monetary policy and manage inflation.
The Reserve Bank assesses various economic factors and indicators, such as inflation, employment rates, GDP growth, and exchange rates, to determine the appropriate level for the OCR. By adjusting the OCR, the RBNZ aims to influence borrowing costs, stimulate or cool economic activity, and maintain price stability.
So what impact does that have on those who already own a home?
Mortgage Interest Rates: The OCR has a direct impact on mortgage interest rates. When the RBNZ lowers the OCR, it becomes cheaper for commercial banks to borrow money, leading to a reduction in mortgage rates. This can result in lower monthly mortgage payments for existing homeowners with variable rate mortgages and potentially make homeownership more affordable for new buyers. The opposite happens when the rate increases, with rates going up and repayments becoming more.
Fixed Rate Mortgages: The OCR also indirectly affects fixed-rate mortgages. While fixed-rate mortgages are not directly linked to the OCR, they are influenced by long-term interest rates, which can be affected by changes in the OCR. If the OCR decreases, long-term interest rates may also decrease, making fixed-rate mortgages more attractive to homeowners or homebuyers seeking stability in their monthly payments.
Equity and Property Values: Changes in the OCR can impact the overall value of real estate properties. Lower interest rates can increase demand for housing, leading to increased property values and potentially boosting homeowners' equity. On the other hand, if the OCR increases, borrowing becomes more expensive, which may dampen demand and affect property values accordingly.
For those looking to buy a home, the OCR plays a key role too….
Affordability: An increase in the OCR can make it harder for homebuyers to obtain financing. Higher mortgage rates mean higher monthly payments and can make the debt-to-income ratio for potential buyers harder.
Competition and Market Dynamics: A higher OCR may decrease demand for housing, resulting in less competition among buyers. As we’ve seen, a higher OCR can cause property values to fall, making it easier for prospective buyers to get a foot in the market. This is often a good time for first home buyers to get a foot on the property ladder.
Loan Approval and Conditions: The OCR can also influence lending criteria and conditions set by banks. Banks may tighten or loosen their lending criteria depending on how the market is responding.
As a homeowner or prospective homebuyer, it is essential to understand how changes in the OCR can impact your financial situation. By keeping a close eye on the OCR and working with trusted professionals, such as your mortgage advisor, both homeowners and homebuyers can make informed decisions that align with their home ownership goals and financial circumstances. If you’d like to discuss how the most recent OCR rise affects your situation, then get in touch with our local mortgage advisors today.