Surviving OCR rate hikes: the Property edit

ocr rate hikes and the property market

Paul Choi is a Financial Adviser with Cambridge Partners. Before joining our team, he worked as a banking adviser for over seven years at BNZ. Paul is no longer a banking adviser but has provided insight into how the OCR affects the housing market.

The significance of the OCR in the housing market

As someone with first-hand experience as a homeowner, rental property investor, and former banker, I have witnessed the intricacies of the housing market and the significance of the Official Cash Rate (OCR). During my early career as a banking adviser, I assisted individuals in financing their home purchases. I helped structure their home loans to align with their cash flow and financial goals. This experience gave me valuable insight into the complex interplay between the OCR, bank lending rates, total borrowing costs, and financial planning.

The Official Cash Rate (OCR) recently experienced a smaller-than-expected increase from 5.25% to 5.50%. Additionally, the Reserve Bank has indicated that the OCR may have peaked. This news brings relief to borrowers who were anticipating even higher borrowing costs. The prospect of interest rates declining towards the end of 2024 offers hope to those entering the housing market or requiring to refix/refinance existing mortgages.

How does the Reserve Bank influence interest rates. (RBNZ, 2023)

This article delves into how the OCR can impact homeowners and rental property investors, highlighting the importance of informed decision-making and long-term planning.

The impact of the OCR on homeowners

Homeownership is a substantial and long-term debt that requires careful long-term planning to ensure sound financial management. As a homeowner, you may know that the OCR directly impacts interest rates and borrowing costs. Fluctuations in the OCR can affect the affordability of your mortgage, potentially impacting your financial stability.

Despite the potential for declining interest rates in the future, individuals are facing increasing difficulty in obtaining pre-approvals to enter the property market or refinance their mortgages. This challenging situation arises from the banks’ assessment of borrowers’ debt servicing ability, which takes into account a rate of 8-9%. Furthermore, soaring living expenses further exacerbate the pressure on household cash flow, adding to the obstacles faced by individuals seeking financing options in the housing market.

The impact of the OCR on rental property investors

If you are a rental property investor, you understand that changes in the OCR can also have significant implications for your investments. When the OCR rises, interest rates on investment mortgages may increase, potentially impacting the profitability of your rental property.

When borrowing costs for investors increase, this can lead to rental increases. The flow-on effect is on tenants who may face challenges staying in their current tenancy or finding affordable housing.

The importance of informed decision-making and long-term planning

Informed decision-making and long-term planning are crucial for homeowners and rental property investors. As a homeowner, you must consider your mortgage obligations and financial stability. As a rental property investor, you must factor in potential changes in returns, rental market dynamics, and government regulations. Periodically reviewing your lending structure and seeking professional advice when needed can help you navigate the effects of the OCR on interest rates and borrowing costs.

If you want to enter the housing market, stay informed and make prudent decisions, such as borrowing within your means.

With knowledge, prudence, and adaptability, you can confidently navigate the effects of the OCR on borrowing and interest rates, ensuring a stable financial future for yourself and your loved ones.

By Paul Choi, Financial Adviser

29 May 2023

Disclaimer: This article is general information, does not consider your situation, and does not constitute personalised financial advice. Sections of this article were sourced using OpenAI (2023) ChatGPT (May 25). There are no warranties, expressed or implied, regarding the accuracy or completeness of any information included in this article. We recommend you speak to a mortgage adviser or banking specialist for specific mortgage and lending queries.

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