What the Dramatic Drop in the OCR Means For Home Owners and Buyers

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What the Dramatic Drop in the OCR Means For Home Owners and Buyers

The RBNZ announced in August that the official cash rate was cut to a new record-low of 1 per cent, surprising many analysts who had only predicted fall of 0.25 per cent. Now this was a major cut that took many by surprise, with the drop doubling what was expected many are celebrating the benefits of the drop while also diving deeper as to why exactly a dramatic drop was chosen.

Benefits for First-Rime Buyers

So why the big drop? From what we have hear from the reserve bank and the government is that the aim is to get people to invest more in the economy – specifically first time buyers.

The RBNZ stated that it has initially debated the relative benefits of reducing the OCR by 25 basis points as opposed to cutting by 50 basis points now, “The committee noted both options were consistent with the forward path in the projections” but reached a consensus for the 0.5 percentage point cut. Prime Minister Jacinda Ardern praised the cuts, quoting low unemployment and increasing wages and indicated that the cut as good news for First Home Buyers, and could see the RBNZ’s drive to stimulate those looking to invest.

But many are still shocked by the large cut and what it could indicate, with many experts suggest it was in response to the RBNZ being perplexed by the non-performance of house prices. In May, the RBNZ had expected that NZ house prices would rise by 0.9% in the June 2019 quarter. In reality the prices dropped by 0.8% in that same period. The RBNZ governor Adrian Orr wasn’t subtle about this, stating while addressing the cuts “yeah, part of the message is wake-up, go and spend”. The banks were also surprised by the cuts, but still predicted another drop in the cash rate to 0.75 per cent in November.

The Continuing Mortgage Wars

As was expected, The banks immediately reacted to the news, with ASB being the first, announcing its variable home loan rate would fall by 0.5 percentage points to 5.2 per cent on August 14 for new customers, with existing customers getting the benefit a week later. BNZ quickly followed, announcing it would cut its floating mortgage rate by 0.5 percentage points to 5.3 per cent. Most banks soon followed this trend igniting the ongoing ‘mortgage wars’ to entice new buyers into the market. With more cuts possibly coming in November, these rates could drop further to record breaking lows.

But many mortgage brokers still stress the importance of making sure you are aware of the financial commitment before getting excited about the low rates, taking on a mortgage is still a huge life decision and it is important to weigh up the pros and cons.

How Much Will It Effect Mortgage Payments?

It is still early days to say how much homeowners will benefit from the dramatic cuts will remain to be seen, with those on a floating mortgage rate benefiting the most, for example, those on the ASB rate – which dropped from 5.70% to 5.20% – would see a reduction on fortnightly payments on a $250,000 mortgage from $670 to $634, saving the borrower $36 a fortnight. But as many experts would point out, few borrowers choose to have their mortgages on a floating rate, with many choosing fixed for the degree of certainty around future payments. ASB only cut its two year fixed rate from 3.79% to 3.75%, so on the same $250,000 mortgage, that would reduce the fortnightly payments from $537 to $535 – a saving of just two dollars a week.


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Ravi Mehta