OCR hits 8%

It’s bad news for property investors taking out a mortgage, with the Reserve Bank’s decision to increase the official cash rate (OCR) by 25 basis points to 8.00%.

Thursday, June 7th 2007, 2:12PM

by The Landlord

By Andrea Milner

Interest rates have already increased across the curve in response.

Reserve Bank governor Alan Bollard partially blamed buoyant housing market activity for the hike.
“This further increase in the OCR is to ensure that inflation outcomes remain consistent with achieving the target of 1 to 3% inflation on average over the medium term,” he says.

Meanwhile those in the finance industry say the impact of this latest lift in the OCR level will continue to hurt property investors’ loan servicing ability.

Tracey Munns, a senior advisor at Connect Mortgages says this means clients may not fit lending criteria or get their loans approved when previously they could.

“It will drive the importance of working with more than one lender, and increase the importance on having a strong broker relationship,” says Munns.

“Investors are still wanting to enter and stay in the market, as they see wealth creation in holding properties for the long term – they are just taking more care with their financial numbers during their due diligence phase in contract negotiations.”

But Munns also sees an upside. “As it gets harder to enter the market we have to remember it also gets harder for renters to move forward and purchase, increasing the demand on investment properties.”

Mike Pero Mortgages chief executive Jeff Staniland says the OCR will give the housing market a headwind that might cause prospective buyers to pause. He says those with fixed interest rates maturing face a 2% interest rate jump, which means an extra $60 per week in borrowing costs.

While Staniland says the hike could choke the economy – and reign in the housing market – he is unsure that the Reserve Bank will achieve its objective of curbing inflation with this move, as Government and local government spending could be the real causes.

“We are at the top of the rate range now; lets hope they won’t go above that.”

But with the hawkishness of the central bank’s accompanying Monetary Policy Statement, both Staniland and Westpac chief economic Brendan O’Donovan are predicting another 25 basis point raise by the Reserve Bank next month.

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