Feeling The Crunch: Mortgage Rate Rises
Mortgage or rent payments are one of your family’s biggest expenses. With recent interest rate rises, it’s helpful to know just how mortgage rates work, why they increase and what rate rises mean for homeowners, homebuyers and renters. This will help you foresee future fluctuations and plan your household spending accordingly.
Spoiler alert: We’ve done the math for you! Our new tool helps homeowners estimate the impact of mortgage rate rises.
Note: the relationship between mortgage rates and rental prices isn’t as straightforward and can be driven by multiple factors, so we’ve not included rent increases in this calculator.
How mortgage rates are set
Lenders such as banks, building societies and finance companies set mortgage rates when determining the cost of borrowing money to buy a property. To understand how they decide mortgage rates, we need to look at how they make money.
At the most fundamental level, lenders find money to lend. They profit by charging mortgage borrowers more than what they pay to the people who give them money. One source of money for lenders is the Reserve Bank of New Zealand (RBNZ) and the cost to lenders to borrow from them is based on the Official Cash Rate (OCR) they set.
Why the RBNZ increases the official cash rate
The RBNZ increases the OCR when it wants to temper the rising cost of living, known in economic terms as inflation.
When rates go up, borrowing becomes more expensive and saving becomes more attractive. This in turn reduces business investment and consumer demand for goods and services. This can help slow down the rising cost of living. The Economist goes into more detail in this video.
Seven times a year, the RBNZ decides whether the OCR should increase, decrease or remain the same. They publish the upcoming dates on their website.
Why your mortgage rates change
When the RBNZ changes its rate, the cost of borrowing for lenders also changes. Lenders then need to decide how much of the change they’ll pass onto you and me. The flow-on impact to mortgage rates isn’t direct or immediate. Typically, variable mortgage rates will move first, whereas fixed mortgage rates are slower to change.
Research by the RBNZ shows one month after a 1% change in the OCR, average two-year mortgage rates move by 0.34%; by six months, the move is closer to 0.8%. As you can see, it takes months for the change to work its way through to the system to you and me.
What this could mean for you and your family
Homeowners: further rate rises are likely to result in higher mortgage payments for the 60% of Kiwis with mortgages that are either on variable rates or due to be re-fixed within the next 12 months (Kiwibank). Furthermore, the impact of rate changes is most keenly felt by newer buyers since interest accounts for a larger proportion of mortgage repayments. To see how much more you might pay on your mortgage, use the Crayon Mortgage Rate Rise Tool below.
Homebuyers: rising rates can reduce demand for property (since it’s more expensive to borrow), resulting in lower house prices. While this makes it easier for you to buy a home, higher interest rates can push up your regular mortgage repayment. Net-net, you might come out ahead, but only just.
Renters: interest rate changes are just one of the multiple factors that influence rental prices, and it’s difficult to draw a direct conclusion. At the core of it, so long as there remain more people who want to rent than there are rentals available, landlords may try to pass on higher interest rate payments in the annual rent reviews.
Where to from here?
That is the million-dollar question. The RBNZ’s decision on rates ultimately comes down to their forecast:
If they think the cost of living will continue to soar, they may raise rates again.
If they are concerned that the economy is slowing down too much and we might be headed for a recession, they may drop rates.
Now for the important legal part: The information we provide is general and not regulated financial advice for the purposes of the Financial Markets Conduct Act 2013. Please seek independent legal, financial, tax or other advice in considering whether the content in this article is appropriate for your goals, situation or needs. The information in this article is current as at 12 January 2023.
Stephanie Pow
Founder and CEO, Crayon
