You have probably heard a lot of talk about interest rates and inflation lately. It can be confusing terms to fully comprehend, and it can be even more challenging to understand how interest rates affect you as a homeowner or home buyer. Let’s take a dive into the rising interest rate and exactly what it will mean for you in this blog post. 

ANZ recently announced that they are lifting their interest rates on both their Classic home loans and their Standard home loans to 6%, which means that other banks will quickly follow suit.

But first things first.

Why are interest rates rising in the first place?

Every major bank in New Zealand, the Reserve Bank and the Treasury all expected inflation to come down by about 0.8% at the next announcement. However, the latest inflation result came out on 18 October at 7.2%, meaning that the inflation has only come down by 0.1%.

This means that inflation is still higher than anyone expected. This increased the interest rate the banks pay to the Reserve Bank, and they are passing that cost right on to you in the form of higher mortgage rates.

But why is the Reserve Bank increasing the interest rates because of high inflation?

Higher interest rates mean that it gets more expensive to borrow money, which will eventually result in people spending less. This will result in a drop in the demand for goods and services, which will cause inflation to fall. 

This is also true for the housing market. When it gets more expensive to get a mortgage, fewer people will buy properties, which will cause a drop in the demand for houses.

So, essentially the Reserve Bank is rising interest rates to combat inflation.

But how does higher interest rates affect me?

As mentioned above higher interest rates will make it more expensive for you to borrow money for your dream home. However, this is not necessarily a reason for you to turn the car around and speed away.

Right now inflation is going up, however, the world is potentially going into recession, which means that interest rates are bound to go down. Remember how the Reserve Bank increases the interest rates to stop the economy from overheating and slow people’s spending down? Well, in a recession the Reserve Bank is doing the exact opposite. Here, they are usually lowering the interest rates in order to get people to spend money and thereby boost the economy.

Furthermore, most banks are giving you a 1% cashback to win you business. This means that if you buy a property for $600,000, the bank will give you $6,000. 

Moreover, with high interest rates you generally don’t want to fix your interest rates for more than 1-2 years (unless you need ultra certainty), and then you can fix again (at a hopefully lower rate). However, you need to beware that interest rates could potentially still go up, which means you could potentially need to take a higher hit later. As always, you need to talk to a mortgage broker to fully understand what the best solution for you is.

Lastly, as mentioned above, when interest rates are going up, the demand for houses will go down as it becomes more expensive to get a mortgage. But what happens when the demand for something decreases? The price decreases as well. Let’s look at an example:

If you need to borrow $600,000 you are paying 2% more in interest rates today than you would have paid at the same time last year. This means you are paying $12,000 more in interest rates every year.

BUT, and this is a big but, because the house prices are decreasing you might be able to leverage negotiation and thereby drive the asking price down with $100,000. So yes, your interest rates are up by $12,000 but you just got the house for $100,000 less.

Sometimes you have to zoom out a little bit so you can see the big picture before you make any rash decisions.

Next week, we’ll share five tips and strategies on how to battle the increasing interest rates, so make sure you come back next week so you don’t miss these tips.

Disclaimer:

Everything shared in this blog post is the opinions of The Mortgage Whanau, and it is general advice. Furthermore, the examples used in this blog post are fictional and are only meant to illustrate a point. For tailored advice, you need to talk to a mortgage broker. You can book a strategy session with us here.