Why Wednesday’s Official Exchange Rate Hike Marks the End of ‘Cheap Money’ for Borrowers

The Reserve Bank’s revised forecast shows that the official exchange rate end point is now 2.6%.

“We now expect the cash rate to hit 2.5% in 2023 (up from 2%),” Kerr added.

Wednesday’s 25 basis point hike in spot rates sparked a series of hikes in floating mortgage interest rates.

ASB, ANZ and Kiwibank confirm that their variable (floating) mortgage interest rates are set to increase.

ASB said it would cross 0.15% of the 25 basis point hike, taking its variable housing rate to 4.60% and its Orbit mortgage rate to 4.70% from December 1 (December 8 for existing loans). ASB’s “Back My Build” rate for new home construction will drop from 2.04% to 2.29%.

Likewise, ANZ has announced that its floating and flexible home loan rates will increase by 0.20% from December 1 (December 15 for existing loans).

Among the five major banks, the lowest floating rate, currently 4% available through Kiwibank, will drop to 4.25% from November 29 (December 13 for existing loans). The bank’s revolving credit rate will drop from 4.05% to 4.30%.

Ahead of the official announcement of the cash rate on Wednesday, fixed mortgage interest rates rose on higher inflation expectations, with markets expecting about a 40% chance of a 50 point hike basic.

Since the majority of mortgage borrowers have fixed mortgage interest rates, higher fixed rates should impact borrowers as their mortgages are renewed in the coming months.

Squirrel CEO John Bolton said higher interest rates are the biggest challenge for new borrowers, as higher repayments equate to less affordability.

First-time homebuyers in particular are also grappling with restrictions on the loan-to-value ratio (LVR), halving the amount of loans available to those with deposits below 20%.

“The number of first-time homebuyers who can borrow now is down by at least 30 percent,” Bolton said.

Banking service rates have increased, making it more difficult to validate the bank’s calculations. And changes to the Credit Conventions and Consumer Finance Act (CCCFA) effective December 1 further force banks to assess affordability.

“We have increasingly conservative banks, higher interest rates and LVR restrictions… it’s the perfect storm,” added Bolton.

“All of these strengths will make it harder for first-time home buyers.”


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