You’ve probably read the headlines – the Reserve Bank of New Zealand (RBNZ) has been reducing the Official Cash Rate (OCR), a decision that impacts the economy and, ultimately, the wallets of many Kiwis. Whether you’re a homeowner managing a mortgage, a saver building your nest egg, or simply navigating day-to-day expenses, this shift in monetary policy could affect everything from your loan repayments to the cost of groceries. So, now you’re wondering “how exactly do the OCR cuts affect me?” Let’s break it down.
- Mortgage Rates: Borrowers get a win!
If you’re a homeowner with a floating-rate mortgage, you’re likely to see some immediate benefits. Banks usually adjust their interest rates in response to OCR changes, and a cut often translates to lower mortgage rates. This can reduce your monthly payments, freeing up extra cash for other expenses or savings.
For those with fixed-rate mortgages, the impact might not be immediate. However, when your fixed term ends, you could refinance at a lower rate, potentially saving thousands over the life of your loan.
Tip: With the upcoming OCR review on February 19, 2025 (with experts predicting another 50 point cut which would take the OCR to 3.75%), consult with your financial advisor on whether now is a good time to refix your mortgage or pay down additional principal to reduce long-term interest costs.
- Savings and Term Deposits: A Mixed Bag for Savers
Lower interest rates may benefit borrowers, but they’re less favourable for savers. When the OCR is reduced, banks typically lower the interest rates on savings accounts and term deposits. As a result, the growth of your savings might fall short of expectations.
For those who rely on interest income—such as retirees or those approaching retirement—this can disrupt financial plans. To offset this, you may need to consider alternative investment options, like shares or managed funds, to achieve better returns.
Tip: Consult with your financial advisor on your investment strategy to ensure it aligns with the current low-interest environment.
- Consumer Spending and Inflation: What’s in Store?
OCR cuts are typically designed to stimulate the economy by encouraging borrowing and spending. When borrowing is cheaper, people and businesses are more likely to take out loans for big purchases, investments, or expansions. This increased spending can drive up demand, which, over time, may lead to higher prices (inflation).
While moderate inflation is a sign of a healthy economy, it can also mean that your everyday expenses—like groceries, utilities, and transportation—might creep up. Keeping an eye on your budget is essential to ensure that rising costs don’t outpace your income.
Tip: Adjust your budget to account for potential increases in living costs and consider ways to boost your income if necessary.
- Investment Opportunities: A Silver Lining
With traditional savings accounts offering minimal returns, many Kiwis are turning to the stock market or real estate in search of better investment opportunities. Lower borrowing costs can make property investments more appealing, often contributing to rising house prices. Similarly, the share market tends to benefit from reduced interest rates, as companies can access cheaper funding to support growth.
That said, all investments come with inherent risks. Given the current global economic uncertainty, it’s more important than ever to conduct thorough research or seek advice from a financial expert before making significant financial decisions.
Tip: Consult with your financial advisor about diversifying your investments to spread risk and take advantage of opportunities in different sectors.
- The Bigger Picture: Preparing for Economic Shifts
While OCR cuts can provide short-term relief for borrowers, they also signal that the RBNZ is concerned about economic growth. It’s wise to consider the broader economic context—are we heading for a slowdown? How secure is your job or business? Preparing for potential economic challenges now can help you stay financially resilient in the future.
Tip: Build an emergency fund, reduce unnecessary debt, and stay informed about economic trends to safeguard your financial health. If you have multiple high interest debts, you might want to consider debt consolidation to streamline them into one single payment.
The recent OCR cuts in New Zealand present both opportunities and challenges for personal finance. Whether you’re adjusting your mortgage, rethinking your savings strategy, or exploring new investments, understanding how these changes affect your financial landscape is key. By staying informed and proactive, you can navigate these shifts with confidence and make decisions that support your long-term financial goals. You can read up on more financial tips and tricks through our previous blog posts.