How will the RBNZ’s rate cuts impact the home loans market?

The Reserve Bank of New Zealand (RBNZ) reduced the official cash rate (OCR) by a combined 0.75 percentage points at its monetary policy meetings in August and October, with further cuts possible at its next meeting, in late November. This is likely to impact the market in three main ways.

First, home loans will become cheaper due to the reduced rates. Banks have already lowered their mortgage rates – and some individual lenders might choose to make further reductions, on top of anything the RBNZ might do.

However, even though rates are trending down, Squirrel’s Head of Mortgages, John Bolton, said borrowers needed to be realistic.

“You don’t want to get caught in the trap of using the insanely low rates we saw during COVID-19 as the benchmark for comparison,” he said.

“Never say never, but those were highly unusual times, so it feels pretty unlikely that we’ll see rates that low again any time soon. And considering it’d take something pretty big, scary and unpredictable to get us there, it’s probably not something we’re hoping for anyway.

“The RBNZ has said that, moving forward, a ‘neutral’ OCR is 3% [compared to 4.75% now]. That means that when we start to see rates around 5% – or indeed anything with a 4 in front of it – that’s going to be a pretty good deal.”

Higher borrowing capacities, more refinancing

The second likely impact of the recent, and potential future, rate cuts is that the average consumer will find it easier to service a mortgage, which means their borrowing capacity will increase. That may lead to more property buyer activity, putting upward pressure on prices.

The third thing to be across is that, as interest rates fall, refinancing will become more popular. Large movements in interest rates can lead to market shake-ups, as some lenders make larger rate cuts than others. As a result, borrowers who are on floating rates might be tempted to switch lenders immediately; while borrowers who are on fixed rates might look for alternatives once their fixed-rate terms come to an end.

At times like these, it’s good to have a mortgage adviser in your corner. If you’re thinking about buying a property, get in touch with a mortgage advisor to calculate your new borrowing capacity and also estimate what your future borrowing capacity might be if rates fall further.

Article courtesy of Loan Market: Published: 20/10/2024

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