Mortgage Rate Fluctuations: Impact on Homeownership in New Zealand

Mortgage rates are on the rise.

The Reserve Bank of New Zealand (RBNZ) have been raising the official cash rate (OCR) consistently since October 2021. The RBNZ’s decisions about monetary policy have left many homeowners and people looking to buy a home curious about how it will impact them. The OCR rises mean that mortgage rates may increase, and it could be concerning for borrowers in the short term.

Reasons Behind the Rate Increases

The RBNZ had a couple of reasons for raising the OCR. One is the recent flooding, which is expected to boost New Zealand’s economic activity slightly. Another concern is that reductions in bank wholesale borrowing costs due to banking sector issues could lead to a fresh round of mortgage rate reductions. The RBNZ explicitly stated that they raised the cash rate to prevent a round of mortgage rate decreases.

The Peak of Fixed Mortgage Rates in New Zealand

The good news is that fixed mortgage rates in New Zealand may have peaked, even after the recent increases in wholesale borrowing costs. This means that borrowers may be able to secure a fixed mortgage rate that won’t increase further.

A Shift in Job Market Dynamics and Inflation

The RBNZ expects more job opportunities to become available. This is important because when not enough workers are available, it can lead to increased inflation through a cycle of higher wages and even higher inflation. The RBNZ feels increasingly comfortable that the unemployment rate is likely to go up. An increase in net migration inflows will likely help with this trajectory.

RBNZ’s Decision-Making Based on Economic Indicators

The RBNZ’s monetary policy decisions will be data-driven from here on out, their monetary policy direction will hinge on the degree to which domestic demand and inflation stabilise. If there’s more proof that the economy is struggling and people expect inflation to keep going down, it’s unlikely that the RBNZ will raise the cash rate again.

How to Afford a Mortgage in the Current Climate

Despite the challenges presented by higher mortgage rates and tighter monetary policy, there are strategies that can help you secure a mortgage or refinance your existing home loan. Here are some tips to navigate the current mortgage environment:

Improve Your Credit Score

A strong credit score is crucial for securing favourable mortgage terms. Ensure you pay bills on time, reduce existing debts, and avoid applying for unnecessary credit.

Save for a Larger Deposit

If you can save a bigger down payment, over 20% of the home’s price, you might get a better mortgage deal with lower interest rates. It also makes it more likely for you to be approved for the loan and lowers the percentage you need to borrow compared to the home’s value (LVR).

Assess Your Refinancing Options

If you already have a mortgage, consider refinancing to secure a lower interest rate or better terms.

  • Shop around: Compare offers from multiple lenders to find the best interest rates and loan terms.
  • Check your credit score: A higher credit score can result in better refinancing deals, so work on improving it before applying.
  • Calculate costs: Factor in closing costs, fees, and potential penalties to determine if refinancing will save you money in the long run.
  • Consider loan types: Evaluate different types of loans, like fixed-rate or adjustable-rate, to see which best fits your financial situation.
  • Timing: Keep an eye on market trends and refinance when interest rates are low to maximise savings.

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