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Home loans are becoming more expensive

Updated: Dec 19, 2021

Following the Reserve Bank’s announcement today that it is increasing the Official Cash Rate by 0.25% to 0.75% I thought you would be interested in knowing what impact I see this having now on the housing market.


Governor Orr’s decision to increase the Official Cash Rate by only 0.25% has surprised many. The banks had anticipated a much more aggressive stance by the Reserve Bank to tackle inflation (currently sitting at 4.9%) hence they have all increased their advertised interest rates significantly these past few weeks. As an example the 3 year special fixed rate has increased by 1.26% p.a. now since 21st October. Mr Orr may well have taken these increases into consideration today with his decision but he runs the risk that he will have to go harder and sooner next time. For borrowers all you need to be aware of is that interest rates are increasing faster than was anticipated, but currently they still remain at levels which historically are very cheap. For most people it appears fixing longer remains the best strategy with your repayments. As always borrowers need to decide themselves though which fixed term best suits them financially. It’s important to stress that New Zealand’s interest rate environment over the last 16 odd months prior to October 2021 was largely artificial having been determined by COVID-19’s financial impact.


As mentioned in my last newsletter the cost of borrowing is just one issue that current and aspiring home owners should be aware of. Changes made to the Credit Contracts & Consumer Finance Act have now seen a significantly higher level of scrutiny placed on borrowers seeking finance to the point where some borrowers will be unsuccessful with their loan applications. Several senior bankers have now publicly criticised these changes as been overzealous and unnecessary as they will only make the goal of home ownership even harder. And if things weren’t challenging enough already for first home buyers, the Reserve Bank’s reduction in the number of home loans that banks can have on their books with a loan to value ratio above 80% from 1st November has seen all the big banks pull out of lending to borrowers with less than a 20% deposit. Only new build loans remain exempt. Whilst this will only be temporary it is still significant as most borrowers without access to a good deposit or money from family have now essentially been shut out of the market. I have already seen and heard examples of purchasers been unable to purchase properties because finance is now impossible to secure. Mr Orr’s decision to implement this policy runs counter to the Government's stated policy to assist first home buyers. My own personal view is that the Government is now too focused on COVID-19.


As I have said previously people sitting on the fence currently about purchasing a property should with the above in mind go and make that purchase now. IF the Reserve Bank gets is wish to introduce debt to income ratios also and these are extended to owner occupied mortgages people’s ability to borrow a home loan will seismically change. A new Government at the next election would likely see debt to income ratios scrapped but the damage they will do meantime will be significant. Without being an apologist for the banks they are already required by law to lend responsibly to borrowers and this is illustrated by the very low default rate on home loans that we have in New Zealand.


Where do I see house prices heading now? Well demand will still continue to outweigh supply and the rush of immigration that will likely occur when the borders re-open in 2022 will ensure house prices continue to go up for the foreseeable future. IF debt to income ratios are introduced this would impact property prices but there will always been more buyers than sellers in New Zealand as we seem unable to build new homes fast enough thanks in part to the bureaucracy of local councils.


Please let me know if you would like to discuss the current interest rate that you are on with your bank or are needing assistance with finance to purchase a new property.


Kind Regards


Simon







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