What has the OCR got to do with me?

In August, the Reserve Bank announced that the Official Cash Rate (OCR) would be lowered from 2.25% to 2%. Markets are also predicting a further cut in November.  While the cut in August was expected, there were mixed reactions to the news – whether it was good or bad news depends on perspective!

What is the OCR?

Basically, the Official Cash Rate is the interest that the Reserve Bank charges on commercial lending overnight – the money banks and big lenders use. So the OCR sets the tone for interest rates charged by banks and lenders to their customers. This means that a falling OCR is usually followed by a falling home loan interest rate, and vice versa.

While most people’s biggest investment is property, there are still many who choose cash investments, and the effect on the OCR fall is markedly different for both types of investment.

So what does this mean for you?

If you’re a home owner, home loan interest rates look set to stay relatively low. With the low OCR, banks and other big lenders are paying less on their own borrowing from the Reserve Bank, so they can pass their savings onto their customers. Your interest rate should stay within a few % of the OCR so if your home loan is floating, you might want to consider fixing a portion of your loan to lock in the good rates.

If you’ve got cash investments, the news is not so good for you. The low OCR means interest rates are low – all interest rates. Your cash investment won’t be earning much of a return as banks aren’t paying out a whole lot of interest at the moment. While term investments in recent years have had some good traction, interest rates with most major banks and lenders are currently sitting between 2-3% on medium to long term investments.

Retailers can rejoice however – consumers tend to spend more when the OCR is lower as there is little to no incentive to invest savings into such low paying term deposits. When interest rates are soaring those who have money set aside will be much more inclined to get their money growing faster by investing it. There’s currently not a lot of motivation to save – other than saving is very good idea – so consumers are more likely to spend (often not wisely, however).

It also means our banks won’t see a huge amount of overseas investments. Overseas investors look to buy $NZ and invest it here when the OCR and interest rates are higher – they get a quicker and better return on their money. So when the rates are low, it’s a pretty unappealing market to all cash investors. This means the $NZ should (in theory) drop in value too – keep this in mind if you are looking at travelling in the near future.

Basically, it’s a good time to be a borrower. Borrowing is much cheaper when the OCR is low as banks are paying lower interest so you can expect to have a number of low interest borrowing options made available to you.

Getting a home loan for the first time may be a little easier too. Home loans are much more affordable when interest rates are low, and money invested in property is going to earn value substantially quicker than any term deposit so now is a good time to grow your wealth through property investment. Just don’t assume that interest rates will always be this low.

It’s a bit of a mixed bag but the clear winners of the low rates are those with money invested in property. It’s not often that the market encourages borrowing and spending at the expense of saving. But these conditions are likely to lead people into some very dangerous territory in the long term.  Before you get carried away on increasing your debt levels for that overseas holiday or home renovations, seek financial advice first.  When it comes to creating a healthy financial future, it’s a long term game.