Mortgage adviser, lender react to RBNZ’s April decision
The official cash rate has hit 5.25%, increasing by a half of a percentage point from 4.75%.
Now at the highest level since 2008, it marks the eleventh straight rate hike since October 2021, as the Reserve Bank of New Zealand continues to tackle inflation, which was 7.2% in the December quarter.
The April hike follows a 0.6% fall in gross domestic product over the December quarter, and the well-publicised collapses of Silicon Valley Bank and Signature Bank in the US, prompting concerns about the health of the global banking system and the possibility of tightening credit conditions.
In Wednesday’s monetary policy review and OCR statement, RBNZ governor Adrian Orr said that recent severe weather events had led to higher prices for some goods and services. Although headline inflation had sunk or started to decline in some countries, core inflation remained high, which he said reflected "significant broad-based capacity constraints".
“This higher near-term CPI inflation increases the risk that inflation expectations persist above our target range,” Orr said.
Jamie & Co director and principal adviser Jamie Sanderson (pictured above left) told NZ Adviser that Wednesday’s hike, although higher than forecasts showed, would not come as a complete shock.
“The RBNZ has been pretty upfront around its plan to try and get on top of inflation, [but] I do think the RBNZ need to tread carefully with signs of a faltering economy,” Sanderson said.
Ahead of the RBNZ decision, ANZ and Kiwibank forecast a cash rate peak of 5.25%, and Westpac forecast 5%.
Basecorp Finance CFO John Moody (pictured above right) acknowledged that the April rise cemented expectations that arrears (while still low), would rise.
As evidenced by the latest Centrix data, repayment stress was already starting to show, with almost 19,000 mortgages past due in February.
As a floating rate lender, where the delivery of higher wholesale rates does not operate with a lag, Moody said that Basecorp Finance was monitoring arrears closely. However, he noted that 60+-day arrears remained low at this point.
“However, we do think our own arrears experience, like those of the wider sector, will tend to track higher over the coming 12 months as financial stress rises in the economy and recessionary conditions linger,” Moody said.
Lending activity turns corner as rates near peak
Sanderson said he was starting to see more activity from first home buyers, who were buoyed by headlines reporting property prices were declining.
Additionally, existing homeowners were reigniting plans to sell and buy their next family home, he said.
While new lending volumes were lower, Sanderson said that buying and selling among existing homeowners is ongoing.
“We are also getting a lot of new clients wanting our help to refix or refinance who are keen to ensure they are getting the best rate they can,” Sanderson said.
Following a “slow summer” for the property market, translating to lower loan sizes for lenders, Moody said the non-bank lender had experienced a “sharp rebound” in loan originations over March.
More recently, he had seen “significant positivity” from the adviser community in relation to the market and the level of enquiry.
“This is in advance of the release of market data, and so we are interested to see if our own experience is an isolated one or evidence of initial signs that the market has begun to turn,” Moody said.
New lending activity was across both owner-occupiers and investors, the increased activity providing scope to continue to build a balanced book, as the company continues to execute its funding strategy, he said.
Helping borrowers to manage costs
Sanderson said that he and his team were getting in touch clients with fixed rate mortgages three months’ ahead of their refix date. This gives them as much time as possible to prepare, and to understand what their new home loan repayments will look like, so that they are able to review and adapt their outgoings, he said.
“At the same time as refixing, it is also important to review the clients home loan structure. People tend to set and forget their loan structure and just refix. But it’s a big opportunity to review structure, products, repayments and loan term,” Sanderson said.
Similar to the way a standard bank floating rate operates, Moody said that Basecorp Finance had repriced its floating loans progressively over the last 18 months, as underlying base rates had moved.
“Because of this, there is not the same level of rate shock as those currently coming off fixed rates where costs may more than double,” Moody said.
However, the business had seen small pockets of customers encountering difficulties, or where circumstances had changed, who needed a helping hand.
“We are doing this proactively and we think there is a clear social mandate for both banks and non-banks to help their customers through any period of financial difficulty, particularly after such a rapid rise in interest rates and with the recent backdrop of adverse weather events,” Moody said.
While a decision on whether to pass on the full 0.50% rise to Basecorp rates had not yet been made, Moody said that historically, the non-bank lender had adopted an approach where it absorbed higher rates in its net interest margin and passed on the increased bank bill rates to borrowers.
Any decision to increase its rates in response to the RBNZ move would be based not only on the associated RBNZ commentary and the updated rates track, but also by bank and competitor responses. Additionally, the business would form its own view on the likely impact of any rates increase on borrowers and on its book quality, he said.
In its monetary policy review statement, the RBNZ said that it had weighed up a 0.25% and a 0.50% hike, noting that in aggregate, economic projections were little changed from the February statement.
“The Committee was comfortable that current lending rates faced by businesses and households will help ensure core inflation and inflation expectations begin to moderate,” Orr said.
He noted that wholesale interest rates had “fallen significantly” since the February statement, which could put downward pressure on lending rates.
“As a result, a 50 basis point increase in the OCR was seen as helping to maintain the current lending rates faced by businesses and households, while also supporting an increase in retail deposit rates,” Orr said.
Following the announcment, CoreLogic chief economist Kelvin Davidson confirmed that flow-through of the 0.50% rise to mortgage rates was likely to be limited, noting that tighter monetary policy had already been priced in by banks. Mortgage rates were likely to be at or close to their peak in the current cycle, which he said was probably the first hurdle cleared in terms of the housing market downturn.