In the 1980’s, the medical alert business was just getting started – ‘Help, I’ve fallen and can’t get up’ – I loved saying this slightly irreverent quote every time I saw someone fumble or fall over as a child – I know, sorry!
The official cash rate has fallen. Are we in trouble NZ? Will the RBNZ need help to get the OCR back up? Is this the beginning of an end, or just a stage we’re going through, along with many other central banks around the globe?
If an economy is struggling, there are a few levers a central bank can pull – don’t worry, this is simplified big time:
- Make the money cheaper. This is what we’ve seen with the lowering of the OCR to 1% recently. The cheaper the cost of money, the faster currency moves inside the system which in turn creates productivity (another theory, that may, hopefully, work). This lever’s been pulled as, presumably, the economy is in pretty rough shape.
- Make more money, period. Quantitative easing – again, using the velocity of money argument, injecting more of anything into a closed system increases pressure, and increases the money velocity, or the frequency with which a dollar changes hands. Central banks around the world have been doing this a lot lately with the most obvious being the US Fed – the result? Many believe that US Equity markets (and most share markets around the globe) have become over-inflated as a result of quantitative easing. The hands that receive this extra, cheap money, invest. They don’t spend. How can a central bank get everyday people to spend?
- Helicopter money. Instead of printing more money and giving it to those dirty bankers – what about simply dropping a bucket of funds on the everyday person trying to make a living – a la UBI (universal basic income). We haven’t seen this yet, but instead of speculating around negative interest rates, this is what I would expect to see sooner rather than later.
So these are three, extremely oversimplified levers that a central bank could use – but so what, what does it mean for you and me, and most importantly our mortgage rates.
Should you break your fixed-rate mortgage, and get the cheaper rates currently available, or just sit tight?
Straight up, in most cases, you should sit tight, and here’s why. Break fees are based on wholesale rates. With the recent OCR cut, wholesale funding costs have decreased, which increases the break fee that you will have to pay to get out of that expensive fixed rate you’re locked into. In other news…Due to pressure from the Reserve Bank to trading banks, in an attempt to improve our ability to withstand a financial crisis, your mightly mortgage provider may have to set aside more capital going forward – this is expensive for banks. I know – who cares right? Well, if you’re using their product (ie credit), they can make it more expensive.
In other words, you may not see the full extent of the OCR cut passing through to you as a borrower – so yes, you will pay more to break your fixed-rate loan but sorry, you may not see enough of the benefit now to make the exercise worth it. It was marginal before (especially when factoring in the costs of borrowing the break fee), but nowadays – just stay put.
Choosing a correct fixed rate is all about cashflow risk management – if it’s something you’d like to discuss further with us, make contact.