Confirmed: OCR rises to 2.75%. When will mortgages feel the impact?

The wait is finally over.

The Reserve Bank of New Zealand announced today that it would raise the Official Cash Rate by another 25 basis points, from 2.50% to 2.75%. This is its second consecutive monetary policy tightening, following the rate rise in July, and matches earlier forecasts from the five major banks and financial markets.

The decision was unanimously approved by the Monetary Policy Committee’s six members. With annual inflation still as high as 4.1%, the Reserve Bank’s message is clear: bringing inflation under control remains the top priority, even while the economic recovery remains fragile. For homeowners, however, a rate rise today does not mean their mortgage bill will increase tomorrow. And for first-home buyers looking for a property, rising rates do not necessarily mean their buying window has closed completely. On the contrary, an unusual divergence is emerging in New Zealand’s housing market: sales volumes have fallen for successive months, confidence in house prices has hit a record low and investors are becoming more cautious, yet first-home buyers’ market share has reached a new high.

Why is the Reserve Bank still raising rates when the economy is weak?

New Zealand’s Consumer Price Index rose 4.1% year on year in the second quarter, remaining well above the Reserve Bank’s target range of 1% to 3%. Although external factors such as fuel have been important drivers of this round of price rises, the Reserve Bank is more concerned that higher inflation could influence business pricing and household expectations, ultimately making inflation more persistent. The basic logic behind raising the OCR is straightforward: higher borrowing costs leave households and businesses with less money for consumption and investment, cooling demand and reducing businesses’ scope to keep raising prices.

The costs are equally clear. Unemployment has already risen to 5.6% in the second quarter, consumers remain cautious and the housing market is still subdued. Further rate rises could weaken household cash flow and put more pressure on an already uneven economic recovery. This explains why the increase, although expected by markets, was not without controversy. Before the decision was announced, just over half the members of NZIER’s Monetary Policy Shadow Board supported raising the OCR to 2.75%. Some of the remaining members argued that economic activity was still weak and inflation expectations had recently eased, giving the Reserve Bank room to hold at 2.50% for now.

The Shadow Board was less divided on the future direction, however. Most members believed the OCR should gradually move towards a neutral range of 3% to 3.25% over the coming year, while maintaining a cautious pace of increases. That means 2.75% is very likely not the endpoint of this round of rate adjustments. What will really matter next for households and the housing market is whether the Reserve Bank pauses to assess conditions as the OCR approaches 3%, or continues pushing it towards 3.25% or higher.

The rate rise is here. Who will get the bill first?

Homeowners will feel this rate rise at different times. Cotality chief property economist Kelvin Davidson says about 10% of existing mortgages are currently on floating rates. These borrowers, including households using revolving credit accounts, will usually feel bank rate adjustments within days. Another 27% or so of fixed-rate mortgages are due to expire within the next six months. These are the borrowers to watch over the coming half-year. Once their loans are repriced, they may face market rates reflecting the combined increases in July and September.

The remaining 63% or so of mortgages have more than six months left on their fixed terms, so they will not be directly affected for now. Recently, expectations of further rate rises have prompted more borrowers to choose longer terms, with two years now the most popular fixed mortgage term. This means the impact will not arrive all at once, but will gradually flow through over the coming months or longer as different loans expire. In other words, some households have yet to feel the full impact of the July increase, and another adjustment has already arrived. Mortgage Alliance recommends that homeowners whose fixed terms expire within the next three to six months review their loan structure early, rather than waiting until expiry and accepting the bank’s first offer. They need to compare more than the new interest rate, including the overall costs of staying with their current bank, refixing or refinancing with another bank. Cash incentives, legal fees, early repayment costs, loan flexibility and plans to sell or repay early can all affect the final choice. Households with several loans could also consider staggering their expiry dates to reduce the risk of all their borrowing being repriced at the same time. However, the structure should be assessed against each client’s circumstances; splitting loans is not suitable for every borrower.

Will fixed rates rise across the board immediately?

Mortgage Alliance founder Tom Tang believes the OCR is only one factor affecting mortgage rates and cannot, on its own, determine whether borrowers should fix for six months, one year or two years. Rates for different terms are also influenced by wholesale funding costs, market expectations and competition between banks. Borrowers should therefore consider income stability, loan size, future funding needs and the timing of their next repricing, alongside whether the Reserve Bank will raise rates at its next decision. A suitable loan structure is often more important than accurately predicting the next OCR move. Mortgage Alliance also points out that the lowest advertised rate does not necessarily mean the lowest overall cost. Some special rates may come with conditions involving minimum deposits, salary credits, designated repayment accounts or other requirements. Banks also have different approval criteria for income, expenses and property types. Alongside rates, borrowers should consider how much they can borrow, approval conditions, cash incentives, early repayment arrangements and product flexibility. A loan that can be approved and fits their long-term plans is usually more important than pursuing the lowest rate alone. The future OCR path deserves even closer attention.

Based on BNZ’s current forecasts, chief economist Mike Jones believes that if the OCR keeps rising through to May next year, floating mortgage rates could exceed 6.5% by the end of this year and potentially pass 7% in the first half of 2027. Two-year fixed rates could rise by about another 0.25 percentage points, while cumulative increases in six-month and one-year rates could reach about 0.5 percentage points. However, this is a scenario based on current economic conditions and BNZ’s interest rate forecasts, rather than a confirmed outcome. Changes in international oil prices, domestic inflation, employment or economic growth would also alter the rate paths of the Reserve Bank and commercial banks.

Sales volumes have fallen for seven consecutive months

New Zealand’s property market had already cooled noticeably before the rate rise. Cotality’s latest figures show 6935 property transactions nationwide in July, including agency and private sales, down 6.4% year on year and marking the seventh consecutive monthly decline in sales volumes. In the 12 months to July, 89,385 transactions were recorded nationwide, below the recent peak of 91,411 in December last year. Cotality’s Home Value Index fell 0.3% month on month in July, indicating that prices still lack clear upward momentum.

With relatively plentiful listings, buyers have little need to rush into making an offer. But with widespread job losses and forced sales yet to emerge, most sellers are also unwilling to accept substantial price cuts. Both sides are waiting, leaving the market with low sales volumes and prices that are flat or edging down. High interest rates add further resistance. They increase repayment costs and reduce how much some households can borrow, limiting buyers’ maximum offers.

Only 9% expect house prices to rise

More significant than falling sales volumes is the marked change in New Zealanders’ confidence in house prices. An ASB survey of 2929 New Zealanders found that only 9% expected house prices to rise over the coming year, a record low for the survey. That figure was still 30% this summer.

Nationwide, 39% of respondents expect house prices to remain broadly unchanged over the coming year, while 19% expect further falls. Regional differences are more pronounced. Only 4% of Auckland respondents expect prices to rise, compared with 6% elsewhere in the North Island. The figure reaches 23% in Canterbury and 18% elsewhere in the South Island, reflecting the different pace of the islands’ housing markets. Rising living costs, the turn in mortgage rates and an uncertain employment outlook are all weakening buyer confidence. Fewer people believe they can make a quick gain from rising prices after buying a home. But that does not mean all buyers have left the market.

First-home buyers’ share rises to 29%

In July this year, first-home buyers accounted for a record 29% of property transactions nationwide, with their transaction numbers also continuing to rise. Meanwhile, despite overall confidence in house prices hitting a low, 20% of respondents nationwide still believe it is a good time to buy. In Auckland, where only 4% expect prices to rise, 23% believe now is a good time to buy. These figures may appear contradictory, but they reflect the different reasoning behind first-home buyers’ and investors’ decisions.

Investors need to calculate rental returns, mortgage interest, council rates, insurance, maintenance and future capital gains. First-home buyers are more often buying to secure a stable home and long-term security. When listings increase, competition eases and sellers become more willing to negotiate, some first-home buyers with stable incomes and sufficient deposits may still choose to enter the market, even as interest rates rise. Higher rates do not affect them in only one direction.

Rising rates reduce borrowing capacity and increase monthly repayments, but they also put pressure on house prices and reduce bidding competition. For some first-home buyers, a lower purchase price may also mean a smaller deposit is needed. BNZ’s Mike Jones describes this as a trade-off: financing costs rise, but purchase prices may be held down. Buyer’s adviser Hadley Nightingale also believes rising rates often cause some buyers to withdraw, leaving serious buyers in the market facing less competition. Today’s first-home buyers may be buying choice, negotiating power and time to think that were hard to secure at the market peak, rather than an expectation that prices will rise immediately.

Mortgage Alliance believes first-home buyers are unlikely to find a perfect moment when house prices and interest rates are at their lowest, income is at its most stable and bank policies are at their most accommodating. For those buying a long-term home, with relatively stable income, sufficient deposits and emergency funds, and the ability to manage repayments at higher rates, today’s market of more listings and less competition may offer better choice and negotiating conditions than the market peak. Before entering, however, buyers should obtain mortgage pre-approval and complete an interest rate stress test, confirming that the household could maintain its normal living standards and essential savings if rates rose by another 0.5 to 1 percentage points.

Investors are recalculating returns

The calculations are more difficult for investors than for first-home buyers. ASB’s survey shows only 10% of respondents believe investment property offers the best returns, the lowest level in five years. The reasons are easy to understand: rental growth is flattening, mortgage rates are rising again, council rates, insurance and maintenance costs keep increasing, and house prices lack clear short-term growth momentum. With the general election approaching, party debates over interest deductibility and potential tax policies are adding to market uncertainty.

Cotality’s figures show that mortgaged investors’ market share edged up in July, so it would be too simplistic to say investors are leaving the market entirely. But with cash flow under continued pressure, it remains uncertain whether that recovery can last. Investors will increasingly focus on actual rental returns and holding costs, rather than simply betting on broad market gains.

Mortgage Alliance believes that in a high interest rate environment, investors need to shift from relying on broad house price growth to paying closer attention to a property’s own cash flow and financing structure. Assessing an investment property requires more than comparing rent with mortgage interest: vacancy periods, council rates, insurance, maintenance, property management fees and potential capital expenditure must also be included. Investors holding several properties should also stress-test their overall borrowing and avoid multiple loans expiring together, creating a sudden cash flow shock.

In its view, this round of rate rises does not mean every buyer should stop taking action, nor that more listings are a reason to enter immediately. What matters is assessing whether a loan fits the household’s income, deposit, life plans and tolerance for risk, rather than simply deciding whether to buy. First-home buyers should focus on pre-approval, household budgeting and interest rate stress testing; existing homeowners should plan ahead for the expiry of their fixed terms; and investors need to reassess rental returns, holding costs and overall cash flow.

No one can predict interest rates accurately, but loan structures can be planned in advance. Mortgage Alliance aims to help clients do more than find a lower mortgage rate: it compares lenders and loan structures to build financing arrangements that are more resilient, flexible and affordable over the long term.

Buying a home may be easier now, but paying for it may not be

With the OCR at 2.75%, the central tension in New Zealand’s housing market has become more pronounced. Buyers face a market with more listings, less competition and greater room to negotiate, alongside rising borrowing costs, a weak employment environment and higher holding costs. First-home buyer activity does not mean the risks of buying are disappearing. Buyers with small deposits in particular will face greater pressure if rates keep rising, prices fall further or household income changes.

Those seriously preparing to enter the market need to ask more than whether current house prices are cheap. They must also calculate whether household cash flow could cope if mortgage rates rose by another 0.5 or even 1 percentage points. Rather than simply pursuing the lowest short-term fixed rate, they should weigh income stability, loan size and future repricing dates. Perhaps the most accurate description of today’s market is that it may be easier to buy a home than before, but not necessarily easier to afford one.

Mortgage Alliance particularly cautions that the maximum amount a bank is willing to approve is not necessarily the most suitable amount for a household to borrow. Banks assess applications primarily against their credit policies and test rates, but households may also face expenses for childcare, education, healthcare, replacing vehicles, supporting parents and changes in income. Beyond the bank’s assessment, buyers should allow room in their cash flow for their actual life plans, rather than stretching household finances to the limit to increase their purchase budget.

The OCR has reached 2.75%, but its full impact on household budgets and the property market is only beginning. Over the next six months, as more fixed-rate mortgages expire, the real pressure from this increase will gradually emerge. For first-home buyers, whether this is a risky period to avoid because of high rates or a rare buying window created by reduced competition ultimately depends on each household’s deposit, income and long-term repayment capacity.

With the OCR now at 2.75%, do you think first-home buyers should keep waiting, or take advantage of plentiful listings and reduced competition to enter the market? Share your thoughts.