The OCR's Dropped – Now What?
The Official Cash Rate (OCR) in New Zealand has dropped, and if you're a homeowner or looking to borrow, you might be wondering what this means for you.
While a lower OCR often leads to lower mortgage rates, there's more to consider than just chasing the lowest rate available. In this summary, we’ll break down what the OCR is, how it impacts borrowing rates, and what you should think about when refixing your loan to make the most of the current interest rate environment.
What is the OCR and How Does it Affect Mortgage Rates?
The Official Cash Rate (OCR) is set by the Reserve Bank of New Zealand (RBNZ) and is essentially the interest rate at which banks borrow and lend money to each other. It’s a key tool used by the RBNZ to control inflation and economic growth.
When the OCR is lowered, banks usually reduce their lending rates, including mortgage rates, making borrowing cheaper. This can be great news for homeowners, as it can mean lower monthly repayments and potentially significant interest savings over time. However, it's important to remember that the lowest interest rate isn’t always the best option for everyone.
Things to Consider When Refixing Your Loan
If your fixed-term mortgage is coming up for renewal, or you're considering refixing your loan to take advantage of lower rates, there are several factors to keep in mind beyond simply locking in the lowest rate available.
Think about your long-term strategy
Consider using interest savings to make extra repayments
Structuring your loan for flexibility and efficiency
Don’t Ignore break fees and refinancing costs
Locking in a rate at the right time
Below we break down each consideration for you.
Think About Your Long-Term Strategy
Interest rates fluctuate over time, so it’s crucial to align your mortgage decisions with your broader financial goals. Ask yourself:
Are you planning to stay in your home for the long term, or might you sell in a few years?
Do you anticipate needing flexibility in your repayments (e.g., for a growing family or career change)?
Would you prefer certainty in repayments, or are you comfortable with some risk?
If you plan to stay in your home for a while, fixing your rate for a longer term may provide stability. However, if you foresee changes in your financial situation, a shorter-term fix or a mix of fixed and floating rates might be better.
Consider Using Interest Savings to Make Extra Repayments
Being in control of your finances often includes having access to savings or an emergency fund if needed. You never know what is around the corner and having access to cash is important. Whilst we need access to these funds, we want to ensure that your hard-earned money is still working for you and not lining the bank’s pockets! You would not believe how much money the banks make off your lazy cash. Now you can stick this money into a high-interest savings account however if you do have a mortgage the interest rate earnt will always be lower than the amount of interest you are charged. With an offset home loan you have the ability to offset your savings and transactional accounts against your loan.
For example, if you have a $200,000 mortgage and $20,000 in your offset account, you’ll only be charged interest on $180,000. This option is great for those of you like me who like to budget and have different accounts for different costs.
Structuring Your Loan for Flexibility and Efficiency
Choosing the right loan structure can help you save money and manage risk effectively. Some options to consider include:
Splitting Your Loan: Instead of fixing your entire mortgage at one rate and term, you could split it across multiple terms (e.g. a portion fixed for one year and another portion fixed for two years). This provides flexibility and reduces the risk of all your debt coming up for renewal at a potentially higher rate.
Offset and Revolving Credit Accounts: These options allow you to use your savings to offset the interest on your mortgage, potentially reducing the amount you pay over time.
Floating Rate Portion: Keeping part of your loan on a floating rate gives you flexibility to make extra repayments without penalty.
Don’t Ignore Break Fees and Refinancing Costs
If you’re considering refixing your loan early to take advantage of lower rates, check if there are any break fees involved. Some lenders charge fees for breaking a fixed-term mortgage early, which could offset the benefits of a lower rate.
Also, if you're thinking about refinancing with a different bank to secure a better rate, factor in potential costs such as legal fees, valuation fees, and any cashback offers that might be available.
Locking in a Rate at the Right Time
Interest rates can move quickly in response to economic conditions, so it’s important to stay informed. Some lenders offer pre-approval of rates, allowing you to lock in a rate before your current fixed term expires. This can be helpful if you expect rates to increase again soon.
The Bottom Line
A lower OCR and falling mortgage rates present a great opportunity for borrowers, but making the right decision isn’t just about getting the cheapest rate. Instead, consider how your mortgage fits into your broader financial plan.
By thinking about your long-term goals, using interest savings wisely, structuring your loan for flexibility, and being mindful of break fees and refinancing costs, you can set yourself up for financial success.
Not sure what’s best for your situation? Contact us at Vesta Finance & Advisory.
We’re here to help you navigate your financial options and ensure you’re making the best choice for your future!
A reminder, the above information is generic in nature and not personalised financial advice. If you would like to discuss the details of your own situation please contact our team directly.