Advisers react to May decision
The Reserve Bank has raised interest rates by another 25 basis points in its continued effort to bring inflation back towards its target range.
Wednesday’s move takes the official cash rate to 5.50%, with the central bank’s aggressive policy tightening continuing to hit the back pockets of Kiwi borrowers.
The RBNZ previously expected the OCR to peak at this level, delivering a 0.50% hike in April to maintain current lending rates faced by households and businesses.
Delivering the monetary policy statement and OCR on Wednesday afternoon, RBNZ governor Adrian Orr acknowledged that interest rates were constraining spending and inflation pressure.
He noted that inflation pressures were easing, latest figures showing annual inflation dropped back to 6.7% in the year to March. Inflation is expected to continue to decline from its peak, and inflation expectations along with it, he said. Core inflation pressures are expected to remain until capacity constraints ease further.
While employment remained above its maximum sustainable level, the RBNZ said there were emerging signs of labour shortages easing and vacancies declining.
“The OCR will need to remain at a restrictive level for the foreseeable future, to ensure that consumer price inflation returns to the 1-3% annual target range, while supporting maximum sustainable employment,” the RBNZ statement read.
According to RBNZ projections, the official cash rate would remain at 5.5% through to mid-2024, with rate cuts from the 3rd quarter, the OCR dropping below 5% in mid-2025. The unemployment rate (currently 3.4%) is projected to increase through 2023 and 2024, reaching 5.4%.
Jen Taylor (pictured above left), director and mortgage adviser at Tailored Mortgages, said the May rise was anticipated, and that her brokerage had already factored slightly higher interest rates into client discussions.
Commenting on whether the rise would affect buyers’ confidence, Taylor said that borrowers understood that rates had risen (and were still rising), and that this wasn’t usually a deterrent in attaining their goal of home ownership.
“If they can do it in this interest rate environment, it’s potentially going to set them up for a date when rates do decrease,” Taylor said.
Borrowers have the opportunity to maintain their payments at the same level and repay their mortgage faster organically, she said.
“The people that we’re seeing definitely have confidence in buying and they’re not letting interest rates affect them.”
Elyce Peters (pictured above right), mobile mortgage manager at The Mortgage Girls said that the implications of high inflation were well-publicised, meaning borrowers were bracing for a further rate hike.
The rising interest rate environment had encouraged fixed rate borrowers to “investigate their finances a lot more” to prepare for the repayment difference when their mortgage rolls over, she said.
Peters said that people were still buying property and that first home buyers were active in the market. She noted that homebuyers could now “take their time” when searching for properties, without the pressures of a flooded market.
“At The Mortgage Girls, we help a lot of first home buyers: many of them started on savings plans to help them get there if they are not able to purchase straight away,” she said.
Peters also noted that increased interest rates, combined with the higher cost of living, affect clients’ borrowing power, and that the implications of higher sensitivity rates had impacted the market.
Helping borrowers prepare for higher interest rates
The 0.25% OCR rise is expected to push variable mortgage interest rates further into the 8% range, while one-year and two-year fixed rates (currently in the mid 6% to early 7% range), could move slightly higher.
Taylor, whose clients are predominantly Manawatu-based (with a small portion nationwide), said she was contacting existing clients with fixed rate mortgages well ahead of their fixed rate expiry date.
For new borrowers, her strategy involves looking for opportunities to take advantage of interest rate falls down the track.
“We split lending over different terms to give clients stability while potentially taking advantage if rates reduce, and if they do increase, it’s only a small portion coming off as opposed to all of their lending,” Taylor said.
The cost of living is a significant focus for clients, and they want to make sure that they are able to manage financially, she said.
“We’re having those conversations a lot earlier than we would have before,” Taylor said.
In the current interest rate environment, borrowers are seeking out mortgage advisers as opposed to going direct to their bank, she said.
Peters said that The Mortgage Girls was also proactively contacting clients, at times up to 90 days before their fixed rate loan review date. This allowed time to receive a response, and decide on the best steps forward, she said.
“Many clients have been breaking early to get onto the new rates earlier, or ramping up their repayments to what they are going to be paying to pay more principal off before their review date, and to get used to their new budget,” Peters said.
Many clients had opted to pay more than the minimum repayment, she said. For clients who were stretched financially, The Mortgage Girls would look at options to extend their current loan term to help them make room in their budget, whilst still paying principal and interest.
Peters said it was important to check existing clients’ financial situations, looking at options such as offsetting savings against their mortgage, and finding smarter ways to utilise their money.
“Our team is always helping clients to achieve their goals…the best way to do this is to know our clients, know their goals and plan to get there,” Peters said.
Ahead of Wednesday’s official cash rate decision, Westpac’s forecast was for a 0.25% rise, while ASB Bank forecast a 0.50% rise. In an open letter to the RBNZ, mortgage brokerage Squirrel said it should pause in May, citing the increase in migration as an inflation-fighting tool”, mortgage borrower impacts and the 2023 Budget.
