Interest rate drops: What this means for homeowners and aspiring home owners
As a home owner myself, the interest rates changes offered by the banks will often grab my attention. In my role here at Lifetime as a Home Loan Adviser, I work with people from all walks of life who are trying to buy their first home. Most people have to overcome the obstacle of saving a decent deposit and KiwiSaver comes to the rescue for a number of people.
We are finding that the banks are tightening up their stance on servicing requirements. In a nutshell this means “does the potential home loan client’s income sustain the lending repayments and living costs?” One major factor of interest rate changes in NZ is the OCR.
What is the OCR?
This stands for Official Cash Rate. The summary below is a quote from the Reserve Bank of NZ’s website:
“The Official Cash Rate (OCR) is an interest rate set by the Reserve Bank. It influences all other interest rates and is, in effect, the wholesale price of borrowing or lending money in New Zealand. It allows the Reserve Bank to meet its goal of ensuring price stability for New Zealand.”
Other factors that affect the interest rates are foreign exchange rates, share market both domestic and foreign, and to a small degree geo-political events.
With the record drop in OCR, interest rates are falling fast, and so too are what the banks call a ‘test rate’. A test rate is a measure the banks use to ensure clients are able to maintain home loan repayments on their current income in the event of a rate increase. Therefore, the rate used to test their ability to service the loan is generally one of the higher interest rates on offer.
The lowering of the test rate will mean that the level of borrowing a bank can lend to a client could increase - really handy if you want to build a deck or modernise kitchen or bathrooms in your home.
An example of a test rate drop; if the test rate of a bank is currently at 7.80% p.a, and then the bank informs all its lenders the new test rate is 7.30% p.a then the uncommitted income of some clients can raise roughly between $160-$200 a month. This extra uncommitted income may have the potential to push an application over the line for an approval instead of a decline or a drop in the amount of lending a bank will offer.
What some people do not know within the lending industry, is that each lender has different interpretations of the Reserve Bank rulings whether they be a main bank like ASB or BNZ, or a small lending bank like TSB or The Co-Operative Bank. Therefore, an application from potential borrowers may be approved at one bank, and yet be declined at another bank.
With the OCR at a record low and interest rates falling, it is a great time to contact your financial adviser at Lifetime to see if we can assist you in buying your first home. Even if you are an existing home owner with a home loan, we can help negotiate with the banks for potentially lower rates and a better structure.
Feel free to contact us for a chat over coffee to discuss potential lending and home purchases opportunities.
Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.
This week the Government announced a suite of new policy with the intent to assist first home buyers into the market. This included tax changes for investors, bright-line extensions and increases to the cap on First Home Loans and First Home Grants.