Cash rate cut, but are banks at their lower limit?
The cash rate has been cut once again by the Reserve Bank, now sitting at an all-time low of 1.75 per cent, only 25 basis points ahead of the Australian equivalent. However, unlike previous cuts, this one has had a somewhat unexpected result: Many major banks aren't cutting their rates to match.
What has happened, and how does it affect your interest rates?
What's happened to the cash rate?
For property, Reserve Bank Governor Graeme Wheeler had this to say:The official cash rate has been plummeting in recent months, and has now dropped from an already-low 2.00 per cent. The Reserve Bank has pointed the finger squarely at weak global conditions and low interest rates relative to New Zealand. The Kiwi dollar is somewhat ironically becoming too strong; unsustainably so, according to the Reserve Bank.
"House price inflation remains excessive and is posing concerns for financial stability. Although house price inflation has moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and demand."
Governor Wheeler is referencing the 12.7 per cent average capital value growth over the last 12 months that New Zealand has experienced. QV reports that some places such as Whangarei have rocketed by 23.9 per cent, with Tauranga leading the pack with 27 per cent. If you had bought a $500,000 home in Auckland last year, it would now be worth $69,000 more at sale, on average.
The last time the cash rate was cut, lenders rapidly adjusted their own rates to match, either on the same day or shortly afterwards. However, that doesn't seem to be the case this time, with major banks either not responding to the cut or actively ruling out a lowering of interest rates altogether. In fact, some banks have actually increased their interest rates after the announcement, according to Canstar.
Why aren't the banks cutting their rates?
The reason that banks tend to adjust to the OCR is because it changes how expensive it is for their daily running of business. The lower the OCR, the less banks have to pay and the more they can lower their interest rates and still remain profitable.
However, that being said, the OCR is not the be-all and end-all, according to the banks.
"We are not making any changes to interest rates today and it's a good time to remind people that interest rates aren't directly or solely linked to the OCR," explains David Bullock, acting director of retail and marketing at BNZ.
"The OCR is just one factor in assessing interest rates. Its importance is diminished when banks need to use offshore funds to cover the gap left by a lack of local deposits," continues Simon Power, general manager of consumer bank and wealth at Westpac.
People seem to be moving more towards the strong gains that property offers rather than using term deposits. As Canstar general manager Jose George points out, this means that the banks have had to increase their borrowing from overseas to support the increased lending demands. Because overseas lending is now so expensive, this results in banks having to actually boost their mortgage rates to compensate.
What's going to happen to my mortgage?
There is a silver lining for current homeowners. With fixed rates being so popular in New Zealand, the rise (or lack of drop) of most interest rates won't be an immediate concern. First home buyers, on the other hand, may be more disproportionately affected as the costs of getting onto the property ladder either increase or stay at their current high.
The loan-to-value ratio restrictions, thankfully, seem to be picking up the slack though. QV reports there has been something of a cooling effect on the housing market already, with fewer listings and fewer buyers on the market even as we head into the typically busy season of summer. There may still be some hope on the horizon for first home buyers.
Looking for more information on what's affecting your interest rate? Get in touch with the mortgage advice team here at Squirrel to find out how we can help you.