You may have heard rumours about the Reserve Bank dropping the official cash rate into the negatives – but what does that actually mean for you and your wealth? We take a look at what the experts say about the OCR, what it’ll do to your mortgage, and how lowered interest rates could provide even more rocket fuel to the New Zealand property market.
Currently, the OCR stands at just 0.25%, having been cut from 1.00% in one swoop in March and to be held there for 12 months, following the economic fallout of the coronavirus both locally and globally. Commercial interest rates for borrowers dropped even further from historic lows as a result.
However, while this was significant news, it wasn’t all that was happening. Earlier this year, the Reserve Bank signalled to the big banks that they should also prepare themselves to lend in an environment where the official cash rate was, for the first time, in the negatives. And the deadline for that change is coming up – fast.
As the OCR drops even lower, economists are predicting that lending rates for borrowers will drop with them. ASB, ANZ and NZIER economists have all come out in predicting a sub-2% interest rate should the OCR cut into the negatives.
“Interest rates both here and abroad have fallen sharply as central banks around the world embark on an extraordinary amount of monetary policy stimulus aimed at lowering interest rates to encourage spending and investment,” explains NZIER principal economist Christina Leung.
Not only that, but many are predicting that the already buoyant property market will boom even higher as credit becomes even cheaper to service.
“Our original expectation for a fall in New Zealand house prices was based on the fact that prices fell during the recessions of the early 1990s, 1998 and 2009,” explains Westpac chief economist Dominick Stephens in a Home Truths newsletter.
“But all of those past recessions were preceded by a rapid increase in interest rates, whereas the current recession was not.”
“This unusual feature of the current recession may be teaching us that interest rates play an even more powerful role in determining house prices than previously appreciated.”
So what does this mean for actual borrowers and current mortgage holders? A negative OCR means that fixed and variable rates could drop significantly – potentially by up to 1% – pushing historically low-interest rates even lower. Not only does that make it cheaper to take on debt, but also to service that which you already hold.
On the flip side, this could also make returns on term deposits, savings and other liquid cash reserves even slimmer than they already are. According to Interest.co.nz, you’d be lucky to get 1.5% interest on a 12-month term deposit, at the time of writing.
Combined with the axing of the LVRs by the Reserve Bank earlier this year as well, it appears that borrowing is going to get much easier – and more attractive – early next year.
With interest rates looking like they’re heading even lower, it may be time to review your mortgage structure to take advantage. Get in touch with an adviser from Money Empire to see how much you could save in interest.