The Official Cash Rate (OCR) has been a topic in recent media discussions. For those considering purchasing a new home, it's essential to understand the significance of the OCR in the economy and how it can influence your ability to secure and manage a mortgage. We explain the OCR's role in the context of buying a home in this blog.

The OCR is the interest rate set by the Reserve Bank of New Zealand (RBNZ), and it serves as a benchmark for the interest rates charged by banks on mortgages and other loans. The RBNZ uses the OCR to manage inflation and promote economic growth. In times of excessive economic expansion, the RBNZ may raise the OCR to curb spending and reduce inflationary pressures. On the other hand, when the economy is sluggish, the RBNZ may lower the OCR to encourage borrowing and stimulate growth.

So, how does the OCR affect you as a prospective home buyer in New Zealand?

Mortgage rates may fluctuate.
When the OCR changes, banks may adjust their mortgage rates accordingly. If the OCR rises, banks might increase their interest rates on home loans, making borrowing more expensive. This can pose challenges for some buyers in affording a mortgage, potentially slowing down the housing market. Conversely, if the OCR decreases, banks may reduce their interest rates on home loans, making borrowing more affordable. This could generate increased demand for homes and contribute to price increases.

Potential changes in affordability.
If mortgage rates increase, it can become more difficult for you to afford a mortgage. Higher interest rates translate into higher monthly payments, straining your finances. If you're already pushing the limits of your budget to afford a home, a rise in mortgage rates could push you over the edge. Again, if mortgage rates decrease, you may be able to afford a more expensive home or secure a better deal on your mortgage.

Impacts on the housing market.
The OCR can also impact the overall conditions of the housing market in New Zealand. A rise in the OCR will often lead to a slowdown in the housing market as fewer individuals can afford to purchase homes. This can result in lower prices or decreased demand for homes. On the other hand, a decrease in the OCR often stimulates a more vibrant housing market, with increased affordability for potential buyers. Consequently, this can often drive up prices or create higher demand for homes.

To better understand how the current OCR affects your specific situation, we recommend consulting with your bank or mortgage broker.