The Reserve Bank of New Zealand’s recent decision to raise the official cash rate (OCR) marks the beginning of a new interest rate cycle, with borrowers facing a different lending environment from the one they’ve become used to in recent years.
The OCR increased from 2.25% to 2.50% in early July – the first rate rise in three years – and economists think further increases may follow.
Borrowing costs are changing
For the past few years, falling interest rates made it easier for many households to refinance, purchase property or upgrade their home.
Now, the focus is shifting from taking advantage of lower rates to managing the impact of higher ones.
For borrowers with mortgages coming up for refixing, monthly repayments may increase if they move from an older, lower interest rate to a new loan at today’s higher rates. Future borrowers may also find that rising rates reduce their borrowing capacity, making it more important to set realistic budgets before committing to a property purchase.
While one rate rise on its own is unlikely to dramatically change household finances, further increases could gradually make borrowing more expensive.
How borrowers can respond
Periods of rising interest rates don’t necessarily require major changes, but they are a good reminder to review your lending arrangements.
If your fixed rate is due to expire soon, it can pay to start considering your options well before refixing. Understanding how different loan structures and fixed-term options could affect your repayments may help you make a more informed decision.
If you’re planning to buy a home, it’s also sensible to leave some room in your budget in case borrowing costs increase further. Stress-testing your finances against higher repayments can provide greater confidence that your mortgage will remain affordable over the long term.
Interest rates rise and fall over time, and no one can predict exactly what will happen next. However, borrowers who stay informed and review their lending regularly are generally better placed to adapt as conditions change.
Rising interest rates don’t affect every borrower in the same way. Contact us if you’d like to review your mortgage or discuss a lending strategy that’s suited to the current environment.
