by Sally Lindsay
For someone refixing their mortgage, the savings can be substantial and a noticeable difference can be seen in mortgage payments.
But interest rate changes don’t work like flicking a light switch, Campbell Hastie, chief of Hastie Mortgages says.
“Think of the economy like an oil tanker. You can spin the steering wheel 360 degrees, but that ship is still going to take a long time to turn. That’s essentially how monetary policy works.up – it takes up to 12 to 18 months, sometimes even longer.
“So, if the reduction cycle started about August 2024, we’re only just now beginning to see the accumulated effects of those changes.”
He says there are a few reasons mortgage holders might not be feeling flush with cash yet:
A loan hasn’t been refixed. This is the big one. The interest rate didn’t drop 2.5% on day one. It’s dropped gradually over time. If a mortgage was fixed for two or three years back when rates were at their peak, it will still be locked into that higher rate until the term ends.
The relief comes in waves. Because most mortgage holders split their loans across different terms, they don’t get all the interest rate relief at once. They might get a chunk of savings when one portion refixes, then more savings six months later when another portion comes due. It’s a little bit now, a little bit later.
Rising costs are eating into the savings. Even as mortgage payments drop, insurance premiums have gone up, power bills have increased and groceries cost more. So while there might technically be more money in a mortgage holder’s bank account from lower mortgage payments, it’s being absorbed by increased costs elsewhere.
Job security. Even when mortgage holders do have extra money in their pockets from lower interest rates, they’re not always spending it. Why? Job security concerns. Throughout last year, people were worried about losing their jobs. When they are uncertain about employment, they don’t rush out to spend any extra cash they’ve got. They save it and build a buffer.
When will things improve?
The good news is that we’re at a turning point, Hastie says.
“All the conditions are aligning for things to start moving in the right direction. As we start the new year, and more mortgages refix at lower rates, money will be freed up in household budgets. By mid-this year, interest rates being paid across all terms will be in the low 5% as things bottom out.”
He says as job security concerns ease (unemployment figures are starting to stabilise), people will feel more confident about spending that extra money. That’s when we willl see the real economic effect kick in.
For anyone looking to buy property or upgrade their house, this becomes interesting.
At the start of last year, I’d run the numbers for clients wanting to buy or upgrade, and tell them they could borrow, say, $600,000. Often, that wasn’t enough for what they wanted to do.
But as interest rates have fallen, so has the stress test rate that banks use to assess a customer’s borrowing capacity. That same client might now be able to borrow $725,000, with the same income and expenses.
That difference – that extra $100,000 in borrowing power – can be the difference between red and green, between no and yes, between staying put and making a move.
The Reserve Bank’s balancing act
The Reserve Bank will be cautious about implementing further OCR cuts, as it is aware of the momentum building in the economy.
The central bank learned a hard lesson after Covid when it reduced rates too far, too fast.
Everyone went mad spending, which created massive inflation. That’s what happens when the levee breaks. And then to plug that gap, interest rates had to shoot up dramatically, which hurt a lot of people.
“Reserve Bank governor Anna Breman will have to strike a delicate balance. She’ll be dealing with potential inflation pressures as the economy picks up.
Economists are picking the inflation rate will be at 3% or above when the figures for the end of last year are released on Friday, but Hastie says Breman can’t squash things too hard, or the country will be back back to boom and bust all over again.
He says while interest rates have fallen significantly. But if mortgage holders are not feeling it in their wallet just yet, they are not imagining things.
“The lag is normal. It’s how monetary policy works. The oil tanker is turning, but it takes time and distance for that turn to complete.
“The key is understanding that the relief is coming. For many people, it’s already here. For others, it’s just around the corner when their mortgage comes up for refixing.”
That’s just how the cycle works, Hastie says.
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