What homeowners need to know about the OCR

The official cash rate (OCR) is an important monetary policy tool for achieving and maintaining price stability in our economy. The OCR is the interest rate at which banks borrow money from the Reserve Bank.

The Reserve Bank of New Zealand (RBNZ) reviews and may change the OCR seven times each year. Any changes in the OCR can have a flow-on effect for people borrowing from lenders, as it can affect the mortgage rates offered.

In this article, we’ll explore how the OCR influences mortgage rates, and what homeowners can do to stay prepared.

The OCR’s impact on mortgage rates

The New Zealand Government requires the Reserve Bank to maintain inflation between 1% and 3% to stabilise prices in our economy. When the RBNZ adjusts the OCR, it signals the direction of monetary policy to the market. A lower OCR stimulates economic growth by making borrowing cheaper, while a higher OCR helps curb inflation by increasing the cost of borrowing (which generally reduces spending).

Changes in the OCR often lead to adjustments in the lending interest rates that banks and other lenders charge. Here’s how:

• When the OCR falls, lenders may reduce their mortgage rates to reflect the lower cost of borrowing. This can lead to lower interest rates and a decrease in mortgage repayments.
• When the OCR rises, lenders may increase their mortgage rates to maintain their profit margins. This can result in higher interest rates and increases in mortgage repayments.

While the OCR is a key driver in fluctuating mortgage rates, it’s not the only factor. Other influences, such as global economic trends, inflation forecasts, and lender competition also play a role.

Tips for homeowners

Whether you’re an experienced, new, or soon-to-be homeowner, it’s essential to understand how the OCR affects your mortgage. Here are the key things to understand:

• The RBNZ typically reviews the OCR every 6-7 weeks. Keeping an eye on these announcements can help you stay informed about any potential changes to mortgage rates.
• If you’re on a floating (variable) mortgage rate, any changes to the OCR can almost immediately impact on your interest rate and repayments. Reviewing your mortgage strategy with a mortgage adviser can help ensure it aligns with your financial goals.
• Homeowners with a fixed mortgage rate won’t see any changes to their interest rate during the fixed rate period. This provides greater protection against any increases to the OCR during the fixed rate period, but if the OCR falls, it won’t result in lower interest rates.

We’re here to help

As mortgage advisers, we’re always up-to-date with current market conditions, including OCR changes. We understand its impact on mortgage rates and can develop a plan that is tailored for you. Contact us today to discuss your situation and we can create a mortgage strategy that is aligned to your needs.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.