Cut Cut Cut - but what does it mean for your mortgage?!
Our customers often ask me about what will happen to the mortgage interest rates when the Reserve Bank cuts them, so that they can decide on what to do with their mortgage.
To answer this you need to realise that there are two types of interest rates for your mortgage.
- Floating / Variable interest rates
- and Fixed Interest rates.
Floating/ Variable interest rates do get affected by the Reserve Bank decisions for the official cash rate. Last Thursdays decision by the Reserve Bank to decrease the Official Cash Rate (OCR) by 25 basis points has led to banks reducing their interest rates on variable mortgage rates only, and possibly will later affect overdrafts, personal loans and credit cards.
Fixed Interest rates are borrowed from overseas markets like Europe, where interest rates are much lower. Changing the NZ official cash rate will usually only affect fixed interest rates if the New Zealand currency is impacted by the change in Official Cash Rate.
Usually there is a correlation between the Official Cash Rate moves and the movement of the New Zealand Dollar.
To explain that further, let’s say that before Reserve Bank action, $1 NZD is equal to $0.66 US.
Normally if the reserve bank increases interest rates, then the NZD will buy more, for example $1NZD purchases say $0.68USD.
This is due to investors in lower interest rate economies moving their money to NZ and investing at higher interest rates here to achieve a better return on their investment. This is called “Carry Trade.”
The sheer volume of money coming into the country will have a supply and demand effect of increasing the value of our dollar, because more people want it.
So the result of our currency getting stronger, means our dollar can borrow more overseas currency, therefore making it cheaper to service that debt. So if our dollar weakens then you may see fixed interest rates in New Zealand fall slightly, but probably not to the same extent as variable interest rates.
But here’s something that might annoy you. When interest rates are on the increase, banks will use this as an excuse to increase their fixed interest rates, probably to the same extent as the Official Cash Rate increases, even though their wholesale borrowing costs from overseas may not have increased by the same amount.
Just an opportunity to increase profit back to their Shareholders.
Neat alright! But what else is neat is that I can come to you anywhere in Tauranga to discuss this further and to look into refinancing your existing mortgage!