The OCR has increased, what does that mean?
OCR stands for Official Cash Rate, which is the interest rate that a central bank sets for a country's economy. It is a monetary policy tool used to regulate inflation and stimulate economic growth. In New Zealand, the OCR is set by the Reserve Bank of New Zealand (RBNZ), and it has a direct impact on mortgage rates. This week the RBNZ has decided to increase the OCR to 4.75%
Mortgage rates are the interest rates that lenders charge borrowers for a home loan. These rates can be fixed or variable, but in either case, they are influenced by the OCR. When the OCR is lowered, mortgage rates tend to follow suit, and when the OCR is increased, mortgage rates also tend to increase. This is because the OCR influences the cost of borrowing money for banks, and they, in turn, adjust their lending rates to reflect this cost.
When the OCR is lowered, banks have access to cheaper funds, and they can offer lower interest rates to borrowers. This can make it easier for people to buy homes or refinance their existing mortgages. On the other hand, when the OCR is increased, banks have to pay more for the funds they borrow, and they pass this cost onto borrowers in the form of higher interest rates.
The OCR also has a broader impact on the economy, beyond just mortgage rates. When the OCR is lowered, it can stimulate borrowing and spending, which can boost economic growth. This is because lower interest rates make it more attractive for businesses and consumers to take out loans and invest in projects or purchases. When the OCR is increased, it can help to cool down an overheating economy and prevent inflation from getting out of control.
The RBNZ typically reviews the OCR every six weeks and can adjust it as needed to achieve its inflation and economic growth targets. The OCR is closely watched by economists, businesses, and consumers alike, as changes in the OCR can have significant impacts on the economy and financial markets.
When the Official Cash Rate (OCR) rises, it may therefore seem counterintuitive to think that it could benefit you when buying a house. However, there are some ways in which a rising OCR can actually work in your favor.
Lower demand and prices for houses
When the OCR rises, it generally leads to an increase in mortgage rates. Higher mortgage rates mean that the cost of borrowing increases, which can make it more challenging for some buyers to afford a house. This can lead to lower demand for houses, which can, in turn, lead to lower prices.
If you're looking to buy a house in a competitive market, a rising OCR could work in your favor. With lower demand, there may be fewer buyers vying for the same properties, which could give you more bargaining power and potentially lead to a better deal.
Potential for lower inflation
The primary reason that the OCR rises is to combat inflation. When the OCR rises, it becomes more expensive for banks to borrow money, and they may pass these increased costs on to consumers in the form of higher interest rates on loans and mortgages.
Higher interest rates can lead to a decrease in spending, which can lead to lower inflation. If inflation is under control, it can help stabilize the economy and make it a more favorable environment for long-term investments, such as buying a house.
Higher returns on savings
If you're planning to buy a house, it's likely that you're also saving up for a down payment. A rising OCR can benefit you in this area as well. When the OCR rises, interest rates on savings accounts and term deposits can also increase. This means that your savings can earn more interest, which can help you reach your down payment goal faster.
More stable housing market
A rising OCR can also make the housing market more stable in the long run. By controlling inflation and preventing the economy from overheating, a rising OCR can help avoid the boom-and-bust cycles that can lead to housing market crashes. This can give you more confidence that the value of your investment will hold steady over time.
In conclusion, the OCR is a critical tool used by central banks to manage inflation and stimulate economic growth. It has a direct impact on mortgage rates, as well as other lending rates, and can influence borrowing and spending behavior. Talk to your financial adviser to discuss your financial goals and how you can benefit from it.
