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On Wednesday the 17th of August, the Reserve Bank put the Official Cash Rate (OCR) up .5% to 3%.
They also signalled they would put it up another .5% in October, and .25% in November, and it would peak just over 4% early next year.
And so forth and up we go.
The OCR announcements always get media attention, and often they are after some expert commentary about how these changes affect kiwis with home loans.
This time around I was the expert and was interviewed by TV3 News and on National Radio. I had my five seconds of fame (literally in the case of the TV interview) and rattled off a few points that were top of mind, as you do, when put in these on-the-spot situations.
Then, of course, I spent a week of sleepless nights thinking about all the witty and wise things I could have said during my media spot-lit moment instead.
So, to get some better sleep, here is my thought-out, edited version of my response to the OCR announcements - and in particular what advice I would have for those with a Home Loan.
In the case of floating home loans - it kind of does, and all the banks increased their floating home loans by 0.4 - 0.5% after the OCR announcements. However, the fixed Home Loans haven't moved (at time of writing 1/9/22.) That is because the fixed rates are determined by a lot of other factors, and in particular, the wholesale rates (see last month’s blog.)
The wholesale rates are pretty stable and look like they have "priced in" the anticipated OCR increases. It is likely fixed rates will continue to nudge up over the next 12 months, but everybody who studies these things would be very surprised to see the rates of increase we have seen over the last 12 months.
The OCR increasing by 0.5% and flowing on to mortgage holders isn't the big story and is a little misleading in some ways.
If your rate was 2.19% and the best rate now is 4.95%, then your payments are going up. Now they probably aren't going to double because the amount of principle you are repaying isn't going to change, it is just the interest part that is going to, but the increase will be significant to many. The good news is we are almost through this and many people who locked-in at 1 year for 2.19% have now refixed.
My advice is to plan for upcoming fixed rate rollovers, so that the increase in payments isn't a surprise. Three to five months prior to a fixed rate rollover, work out what the likely new payments are going to be (we can help you with this) so you have time to process that and adapt as needed. I think the biggest issue is when there is a sudden unexpected increase. My advice is don't let it be a surprise but give yourself enough time to process the change and adapt as needed.
My advice is to plan for upcoming fixed rate rollovers, so that the increase in payments isn't a surprise.
When the bank gave you your home loan, they tested your loan repayments as if they were 5 or 6 %, and they still believed you could afford it (if they didn't, they legally couldn't have given you the loan.) If the banks believed you could afford the loan - there is hope that you can!
When you are setting your loan up, for most people it is good to keep some flexibility. If you are going to pay more off than the minimum, then you may want to set up your loan so you can access these funds when required. There are smart ways to do this, to not only get your loan paid down quickly in the good times, but also to build a buffer up that you can draw down on if you need to in the tough times.
Financial advisers generally can't make the payments cheaper, but we can work through options with you. If you are concerned about rising mortgage payments, then do talk to your mortgage adviser at Velocity. We are here to support you and make sure your mortgage set up is as best as it can be.
Brendon
Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website.
About Brendon:
Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice I worked as a youth worker and managed teams for a not-for-profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts, I can be found running the trails of Wellington.