OCR. These three little letters are kind of a big deal. But what exactly do they mean and how could they affect you?
On 9 October, the official cash rate or OCR decreased from 5.25% to 4.75%, with major banks responding with rate reductions prior to the announcement, and others will no doubt follow. Let's take a closer look at what this change could mean for you.
1. What is the OCR?
The Reserve Bank is New Zealand's central bank for most registered banks in New Zealand.
It is responsible for ensuring New Zealand has a sound and effective monetary and financial system including regulating the banks.
These banks hold settlement accounts at the Reserve Bank which are used to settle the obligations between the banks at the end of the day. Due to the large volume of daily bank transactions, each bank can end the day in credit or debit.
The Reserve Bank covers these ups and downs by either paying or charging interest to banks, depending on whether they are in credit or debit. Banks can borrow money from the Reserve Bank at a rate 0.25 percent higher than the OCR or they can lend money to it at a rate 0.25 percent lower than the OCR. The official Cash Rate then influences the cost of borrowing for banks, which affects the rates banks are able to offer to consumers.
2. How could the OCR affect your mortgage rate?
Generally speaking, a lower OCR means lower mortgage interest rates and vice versa. That's why when the Reserve Bank cuts the OCR, everyone gets a little excited.
Generally, banks will pass on at least some of the OCR cut, if not all - which means if you’re on a floating rate it may have already decreased, and next time you’re due to refix (provided the OCR has not gone up again) you might find that lower rates are available.
This change comes at the same time as inflation is slowing down, which means life may be about to get a little bit more affordable
3. How long should you fix for?
As a result of these predictions some bank economists suggest that fixing for a shorter term may provide the best value right now, but this does depend on your individual circumstances, so we recommend speaking to your mortgage broker or financial adviser.
An excerpt from ANZ’s August Property Focus report explains why they think this might be the case “...If you are only (or primarily) focused on cost, then what terms look best? Longer terms are cheaper, so ought to at least be considered, but at the same time, we and the RBNZ expect more cuts to come, meaning that some short-term pain may yield some long-term gain, as the saying goes.”
With that said, ANZ also suggests interest rate averaging to spread risk: “From the outset, it’s worth noting that we always see merit in spreading risk over several terms. Doing so can reduce repayment volatility and spread your risk.”
4. Get financial advice from the experts
If you’ve got a fixed rate renewal coming up it’s always best to seek personalised financial advice from a mortgage broker or registered financial adviser before making any decisions. They’ll be able to take into account your personal financial circumstances and your goals to create a personalised mortgage structure that suits you.
Read more about finding and choosing a financial adviser.
Disclaimer:
This ‘What does the OCR change mean for your mortgage?’ blog is general information only. The views and opinions expressed do not necessarily reflect those of the FSC. It is not intended to constitute legal or financial advice and does not take your individual circumstances and financial situation into account. We encourage you to seek assistance from a trusted registered financial adviser, legal or other professional advice.
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October 2024
