In the recent OCR review on November 13, the RBNZ decided to keep things constant rather than adjusting the OCR downward as expected by many economists and investors alike. Nonetheless there is still commentary out there in the market expecting reductions over the next few OCR reviews. Some expect cuts as much as another 0.50% or 0.75%, which could mean we see an OCR as low as 0.25% in 2020.

What Does This Mean For You As A Borrower?

Well on one hand it could potentially mean we see mortgage interest rates cut further and therefore cheaper funds for those of us out there borrowing. As we know, mortgage related expenses are usually the largest ongoing cost relating to OPEX of owning a property, investment or otherwise, and so reductions in this cost tends to make the overall market more attractive (due to increasing yields) – and we know what more demand does to an asset class.

On the other hand, the OCR isn’t the only thing borrowers need to be watching; there is the Capital Adequacy Review and Financial Stability Report both later this month; and also bank imposed debt servicing calculations which are still very strict relative to the cost of money.

The Capital Adequacy Review later this month indicates that our major banks may need to hold more capital which could in turn influence mortgage rates. This increases the cost of funds for banks and therefore these costs (as with any business) are usually passed on to the consumer.

The idea behind this proposal is that it will stabilise our banking system. But conversely, I think there may be unintended effects which the increased cost of capital creates. These could pose a risk to borrowers who have stretched themselves. It will be interesting to see how this plays out.

In addition, with deposit rates so low, for depositors it becomes less attractive to put your money in the bank. This may also mean a tighter credit market with lower availability of funds.

In terms of bank debt servicing calculations, in some cases banks are lending out money at less than half of the rate they are testing affordability at. This disparity is simply too large and we would anticipate it getting smaller, as we’ve seen with some changes from the likes of ANZ reducing their test rate from 6.90% to 6.65% in November.

Recently in terms of mortgage rates being offered, we’ve seen some lenders like SBS offer rates as low as 3.39% for two years (others are competing with this rate but in the 18-month space). We’re still seeing some other banks offer lower than this (Bank of China, HSBC) but in many cases these lenders still tend to have a relatively small market share (although it is growing).