On July 13 the Reserve Bank (RBNZ) reviewed our official cash rate (OCR) and increased it by another 0.50 per cent, from 2 per cent to 2.5 per cent. The OCR has been our primary monetary policy tool in New Zealand to assist the RBNZ in meeting its mandate to control inflation, which is currently significantly higher than their targeted 1-3 per cent.

The OCR is the interest rate for overnight transactions between banks, which affects the wholesale price of borrowed money. As a result, this directly affects commercial banks and in turn affects the price in which we (as retail mortgage borrowers) borrow money. In general, the higher the OCR, the higher our interest rates.

The last time our OCR was at this level was early 2016, and economists are expecting it to peak later this year or early next year, at around 3.5-4 per cent.

Lower Rates

Monetary policy is important because it directly influences our economy by affecting decisions businesses and individuals make in terms of investment and consumer spending.

Rates at the moment vary, but most banks have their floating rate around or above 6 per cent. During July, due to the fact that swap rates have pulled back a little, many banks are offering lower two-year rates than they were a few weeks before. These are now anywhere between 5.35 per cent and 5.45 per cent.

It is important that in a rising interest rate environment you, as a borrower, review your current rates and gain an understanding of when the fixed rate expires and what your new payments could be.

This applies if you’re on interest-only and your term is about to end, a principal and interest mortgage, or even a combination of both, which could be quite difficult from a cash flow perspective.

Bank Incentive

But there are differences in interest rates and relatively high cash contributions offered by some banks (up to 1 per cent of the loan). With such a large cash incentive you could be looking at several thousand dollars for moving banks. For example, on an $800,000 mortgage this could be as much as $8,000 in cash, so once you’ve paid your solicitor’s bill for switching banks you’re still likely to end up with surplus cash in your back pocket.

When adding interest rate differences and cash contributions this could be the difference between staying with your existing bank or looking elsewhere.

This sort of incentive from banks won’t last long, so we would need to have an application submitted for you within the next few weeks, which means you’ll need all documents submitted to us quickly.