The OCR & Your Home Loan Interest Rate
The Official Cash Rate (OCR) has been prominent in the news lately. That is because in the last 7 weeks it has gone up twice after staying unchanged for a year - it is now at 3.0%. What does this all mean? Well in a nutshell – if the OCR goes up, your home loan interest rate is likely to go up. But usually it is too late once the announcement is made to run out and get a cheap interest rate...
Banks (those guys lending you money for your home) spend a lot of time predicting what is going to happen to interest rates (the OCR movement is part of this) they don’t wait to see what happens at 9am on Monetary Policy Statement and Official Cash Rate review dates (which are usually Thursdays every 6 – 7 weeks apart ) when the governor of the Reserve Bank of NZ (RBNZ), currently found here, makes an announce that the OCR is either going up, going down, or staying the same.
Banks are usually well ahead of the game and have adjusted their fixed term mortgage interest rates well before any OCR announcement – especially those rates for fixed terms of one year and above. Usually, the only interest rates that change immediately when the OCR changes are floating interest rates.
The OCR is not the only factor banks use in setting your home loan interest rate. This interest rate is affected by many things - one is the ‘funding cost’ – this is the amount charged by the guys who are lending your bank money (this is the bit where the OCR has some effect) and another is what ‘margin’ your bank decides to put on top – this margin is usually based on cost and risk analysis. Over the last few years, the risk associated with your bank lending you money has increased - amongst other things - house prices have fluctuated and people's ability to make mortgage repayments has been influenced by an economy in recession. This has meant that a larger 'margin' has been added by banks to cover risk.
So should you take any notice of the OCR? Yes! But you need to be paying attention long before the change actually happens - when the OCR goes up (or down), unless it is a big surprise, the change has usually long since been factored into rates available – you are better off focusing more on what the OCR is predicted to be doing over the coming months and using this information when you are deciding about what to do with your home loan.
On OCR announcement days it is actually the commentary that goes along with the OCR announcements that has a greater affect on home loan interest rates. What is said by Dr Alan Bollard can have a strong affect on interest rate forecasting, this is the info that banks are after and are using in their longer term interest rate adjustments. Here you can find what Dr Alan Bollard said on the 29 July 2010 OCR announcement.
Want the run down on monetary policy including about how the OCR affects bank lending rates? Head this way!
Want some expert advice on where mortgage interest rates are heading and help with sorting out lending – a mortgage broker is a good place to start. You can organise a free chat with a local mortgage broker here. Otherwise, check out our mortgages and money section for all you need to know about borrowing for a home.
And don't forget - we have some solid home buying advice in our house buying guide.