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.
Market & Portfolio Update - April 2022
Global share markets continued their choppy start to 2022 during April.For New Zealand based investors, a fall in the NZ dollar played an important role in helping offset the volatility global share markets experienced. The NZ dollar fell against most major currencies supporting the returns of unhedged overseas assets (assets that are free to move with exchange rates). As a result, ‘unhedged’ overseas investments fell by only 1.8% for NZ based investors.
The KiwiSaver Gender Divide – Why are women saving less and what can be done to combat this?
Recent data shows that, on average, women have 20% less in their KiwiSavers than men. The gap being at its largest between men and women in their 40s and 50s. There are a few factors that come into play causing this divide and although it will take years to achieve equality, there are ways in which we can be proactive to help close the gap. As of August 2021, the gender pay gap is at 9.1% in New Zealand, a decrease of about 0.4% from 2020’s stats.