Rates may not be dipping just yet
THE RESERVE Bank’s latest Official Cash Rate cut is good news for borrowers but homeowners shouldn’t expect a comparably dramatic drop in mortgage rates.
This month the bank reduced the OCR from 1.5 percent to 1.0 percent.
‘‘No surprise that they cut,’’ CoreLogic senior property economist Kelvin Davidson says, ‘‘but the size came as a bit of a shock.
‘‘Clearly, this is supportive for the residential property market, although the passthrough to mortgage rates is likely to be less than 0.50 percent.’’
He says the cut will support property demand and prices, especially given the unemployment rate remains very low.
‘‘However, we doubt that an even lower OCR will cause the housing market to roar back to life - after all, mortgage rates already seem to have ‘priced in’ the low OCR environment, and the banks will probably also be looking to maintain their margins in advance of any extra capital
requirements that could kick in from April next year.’’
Davidson says tight lending criteria, such as income/expense and serviceability testing, are arguably the biggest restraint on the residential property market.
‘‘This means a lower OCR and/or mortgage rates would have little effect, anyway.
‘‘Overall, the remaining four-to-five months of the year will be really interesting for monetary policy and the housing market, even if further OCR cuts may now no longer be seen.
‘‘The key things to watch for will be a probable loosening of the loan-to-value ratio rules in November, but on the other hand, some of that fuel being taken away by scope for tighter bank capital requirements.’’
‘‘If I were borrowing at the moment, I would be inclined to hold off fixing for the moment,’’ BNZ chief economist Tony Alexander says.
‘‘I can’t help feeling that one of the main lenders will introduce an aggressive fixed rate given the way that the margin over swap rates has blown out recently - though calculating the true cost of funds to banks is no longer easy.’’
Westpac economists expect the Reserve Bank to lower the OCR once more in November, which would trigger both floating and fixed mortgage rate falls.
‘‘Three-year fixed mortgage rates seem the best value on offer today,’’ they say.
‘‘However, opportunities to fix at an even lower rate might emerge over the coming month or two.
‘‘Today’s one- and two year rates are also fairly good value, with neither strongly preferred to the other.
‘‘Four- and five-year fixed rates are higher than where we expect shorter-term rates to go over the relevant time frame, but longer-term fixed rates do offer insurance against the risk of future interest rate increases.’’