Interest increases with OCR

Mangere home owner Alexa Langdale outside her home in Beryl Place Mangere, South Auckland.
Peter Meecham
Mangere home owner Alexa Langdale outside her home in Beryl Place Mangere, South Auckland.

The official cash rate, or OCR, influences the interest rates retail banks offer to you and me.

Generally, the Reserve Bank says, market interest rates are held around the OCR level which has been 2.5 per cent since March 2011.

This means for the past three years Kiwis have enjoyed cheap debt.

But nothing lasts forever. Many of the big retail banks are now tipping an OCR increase next year, ANZ as early as January and ASB in March.

So what will a rise in the OCR and retail bank interest rates mean for Kiwis?

It depends if you are a borrower, or a lender.

Kiwis love to borrow. Most of all, we love to borrow to buy houses.

The Reserve Bank's November Financial Stability Report spells it out - New Zealand's household indebtedness is high.

Our household debt-to-disposable income ratio is 146 per cent, not far off the 2009 peak of 153 per cent - this means that for every $1 we earn, we owe almost $1.50.

In addition, growth in housing-related debt has outpaced income growth and the bank warns borrowers may have difficulty servicing their obligations as interest rates begin to rise.

More than 30 per cent of New Zealand households are currently paying a mortgage, Statistics New Zealand's Household Economic Survey for 2013 found.

Reserve Bank statistics show we owe $186 billion for housing loans and on average Kiwi's spend $356 per week on their mortgage, the Household Economic Survey reported.

But 61,000 Kiwi households - or more than five per cent - who own or partly own the home they live in, spend 40 per cent or more of their total income on housing, Statistics New Zealand says.

These borrowers with "stretched debt positions" will feel the most hurt from interest rates going up, including new home buyers with small deposits, the Reserve Bank says.

Alexis Langdale and her partner purchased their first home about a month ago - lucky to get into the market before the rules on home loan deposits changed, she says.

They bought a three-bedroom, one bathroom, property in Mangere East for $490,000.

Langdale says the mortgage payment is about $1200 a fortnight and her eyes are firmly on interest rates.

An increase in rate of 1 per cent for Langdale would see her mortgage payment increase by more than $100 a fortnight and add about $35,000 in interest to the loan over 15 years.

"We put a bit of money aside every week just so that we can have enough when rates rise. It's pretty difficult at the moment, and we are definitely concerned about it."

Dannevirke resident Hannah Wallace owns a three-bedroom home, borrowing just over $110,000.

She and her partner pulled money from their KiwiSaver accounts to get the keys to their first home.

Wallace has a fixed rate for three years of 6.29 per cent with weekly payments of $160 so can breathe easy - for a while anyway.

"If in three years there is only a one per cent rise, we wouldn't really be bothered financially, but if in three years there is more than a one per cent rise, we would really have to consider hard budgeting."

She says both she and her partner expect their wages to increase which helps them feel "a little bit more comfortable".

"Also being in a small town with house prices so cheap it was quite easy to get a smaller loan."

The Reserve Bank is flagging interest rates will be in the "vicinity" of 7 to 8 per cent in the next two-to-three years.

BNZ is currently offering a 5.99 per cent three-year fixed mortgage interest rate, as is Westpac, and both banks are offering about 5.75 per cent floating.

Commission for Financial Literacy and Retirement Income executive director David Kneebone says it's a good idea for mortgage holders to calculate the cost of their mortgage adding a rate increase of 1 or 2 per cent more.

You need to work out what the impact will be and how much you will have to pay - and if you can afford it, Kneebone says.

The commission's website, Sorted, has a mortgage calculator that makes it easy to do.

For every mortgage-holder sweating on a rise in interest rates, there are those who have been feeling the pinch from poor returns from fixed interest investments.

Kiwis have $119b deposited with registered banks, Reserve Bank figures show.

These Kiwis are in effect lending their savings to the bank which the bank can then play with and lend out, slaking our thirst for mortgages.

And just as mortgage rates are influenced by the OCR, so are term deposit rates - the rates you can get to keep your savings in a bank for a set time period. But in this case low rates are a financial drag.

Our national saving rate is low by international standards and has been trending down over the past three decades, a research paper by Treasury principle advisor Anne-Marie Brook reported earlier this year.

Again - this is our hyper housing market at play.

Brook says high property prices tend to be associated with "lower-than-otherwise" private saving.

It's not clear why this is, but Brook points to high house prices allowing more borrowing, and more borrowing reducing our disposable income and ability to save as we spend more on housing debt.

On average, Kiwi households earned just over $4000 from investments for the year ended June 2013, the Household Economic Survey reported, an increase from 2012 of about $500.

New Zealand Institute of Economic Research principal economist Shamubeel Eaqub says about one quarter of New Zealanders have investment incomes and they tend to be older "when they can enjoy the fruits of their savings during their working life".

Fixed interest investments are low risk but the rates that have been on offer have been correspondingly low - from about 2 to 5 per cent depending on the length of the term you are locking in and the size of your investment.

For Napier retiree Trevor Wakely a rise in interest rates would be "wonderful".

Wakely has a small fixed interest term deposit of about $2000 earning 4.5 per cent interest.

This should earn him about $90 per year minus the tax he hates - withholding tax.

Even a rise of 1 per cent would certainly help, Wakely says.

An increase in rate to 5.5 per cent would see Wakely earning an additional $20 a year in interest, which could then be added to the amount invested.

"Up another notch of interest would be nice, and an interest rate of between 8 and 10 per cent would be great," he says.

If interest rates hit the top of the range the Reserve Bank suggested could be reached in the next few years, 8 per cent, Wakely would double the amount of interest he was earning to $160 per year.

Invercargill super annuitant Dale [he didn't want to use his real name for this story] brings in about $1400 per year after tax with a term deposit investment that's earning just over 4 per cent.

The former teacher says he and his wife will welcome an increase in rates and a better return on the money they have "invested in the New Zealand economy".

"I would like to see it earning more than 4 per cent." An increase to seven per cent would see the 83-year-old's investment return increase from $1400 to $2450 - meaning the nest egg for his grand-children will grow much faster.

"I would like to think we could leave them a little bit of money to mark our passing. It also gives a sense of security to know the money is there."

And then there's everybody else; neither borrowers nor lenders.

Inflation tends to rise with interest rates, meaning everything that we buy will probably get more expensive too next year when - or if - interest rates rise.

Fairfax Media