Why Wednesday's Official Cash Rate rise spells the end of 'cheap money' for borrowers

ASB, ANZ and Kiwibank confirm increases to their floating interest rates on Wednesday.
ASB, ANZ and Kiwibank confirm increases to their floating interest rates on Wednesday. Photo credit: Getty Images.

Floating mortgage interest rates across three main banks are going up, spelling the end of cheap money for borrowers.

The Official Cash Rate has gone up by another 25 basis points, to 0.75 percent. It marks the second consecutive cash rate rise after it was held at the emergency setting of 0.25 percent for 19 months.

As the Reserve Bank starts to unwind that emergency setting, Kiwibank chief economist Jarrod Kerr said record-low interest rates, which were even lower than the lows of the 1950's, are no more.

"The time of cheap money is over, and interest rates are rising swiftly…the RBNZ is normalising policy by taking interest rates back to more normal levels," Kerr said.

Revised Reserve Bank forecasts show borrowers should brace themselves for seven more cash rate hikes.

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

Wednesday's 25 basis point cash rate hike has triggered a series of increases to floating mortgage interest rates.

ASB, ANZ and Kiwibank confirm their variable (floating) mortgage interest rates are about to go up.

ASB said it will pass through 0.15 percent of the 25 basis point rise, taking its housing variable rate to 4.60 percent and its Orbit home loan rate to 4.70 percent from December 1 (December 8 for existing loans). ASB's 'Back My Build' rate for new home builds will increase from 2.04 percent to 2.29 percent.

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

Across the five main banks the lowest variable rate, currently 4 percent available through Kiwibank, will increase to 4.25 percent from November 29 (December 13 for existing loans). The bank's revolving credit rate will increase from 4.05 percent to 4.30 percent.

Ahead of Wednesday's Official Cash Rate announcement, fixed mortgage interest rates rose off the back of higher inflation expectations, markets pricing in around a 40 percent chance of a 50 basis point rise.

As the majority of mortgage borrowers are on fixed mortgage interest rates, higher fixed rates are expected to impact borrowers as their mortgages roll over in the coming months.

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

First-home buyers in particular are also grappling with loan-to-value ratio (LVR) restrictions, halving the amount of lending available to those with deposits less than 20 percent.

"The number of first-home buyers that can borrow now has gone down by at least 30 percent," Bolton said.

Bank servicing rates have gone up, making it harder to pass the bank's calculations. And changes under the Credit Contracts and Consumer Finance Act (CCCFA) from December 1 put greater onus on banks to assess affordability.  

"We've got banks getting more conservative, higher interest rates and LVR restrictions...it's the perfect storm," Bolton added.

"All of those forces are going to make it harder for first-home buyers."