What do falling interest rates mean for home renovations?

ARTICLE Mina Phillips

While experts predicted a drop in the OCR (Official Cash Rate), many were surprised last week when the Reserve Bank cut the OCR down to 1.0 per cent. In a statement released by RBNZ on the 7th August, it was said that “the Monetary Policy Committee agreed that a lower OCR is necessary to continue to meet its employment and inflation objectives.” But what does this mean for homeowners and homebuyers who are interested in renovating?  
The OCR is managed by the Reserve Bank of New Zealand, a central bank who exists to take care of monetary policy. The RBNZ reviews the OCR multiple times a year in connection to its influence on New Zealand’s economy - taking price stability and New Zealand’s overall financial system into account.
“The OCR is a Reserve Bank (RBNZ) tool used to stimulate or dampen economic activity”, adds financial advisor Deborah Carolyn. 
While an OCR cut was expected, banks and economy experts alike weren’t expecting such a large drop in percentage. When an OCR is cut, the general consensus is that it is good news for homeowners, mortgage payers and first home buyers - but is not such great news for investors. However, most experts will emphasise that this depends on your situation, and that it’s important to remember that the OCR can change multiple times a year. Nevertheless, this particular OCR cut stands out as being dramatic and unique -  www.interest.co.nz points out that, until now, the OCR has only been cut this much as a result of major events; such as the 9/11 attack and the Christchurch earthquake.
In their August 2019 statement, the RBNZ explains what this could mean for the housing market.
“The outlook for household spending was discussed with regard to the assumed dampening impact of soft house price inflation. Some members noted lower mortgage rates could contribute to a stronger pick-up in house price inflation, which could support consumption. Other members noted that house price inflation could remain weak, for example, if net immigration continued to decline relative to the number of new houses being constructed.” 
Lower interest rates create an investment attraction, explains Deborah:  
“If companies can finance themselves at cheap interest rates, this should encourage them to borrow to spend on plant and equipment, upgrade technology or hire more staff. Low-interest rates also make it less attractive for consumers to keep money in savings accounts – they might invest in shares for a higher return or spend on goods and services.” 
Banks have been very quick to respond to the cut, indicating that, yes, an OCR cut means an easier life for homeowners and borrowers - in the short-term at least. www.mortgagerates.co.nz reports that ASB, BNZ, ANZ and Kiwibank have all announced cuts to home loan rates, in response. 
“The OCR is the rate the RBNZ pays to trading banks on overnight deposits”, explains Deborah. “When it is low, this encourages banks to instead lend more to home-owners and businesses. Banks charge a margin over the OCR so if it is cut, all interest rates tend to fall in proportion.”
What this means is, banks will be more likely to lend more to homeowners who are wanting to finance a renovation, or who are looking to purchase a home.  
In an interview with Seven Sharp, Bernard Hickey from Newsroom Pro stated that “by the end of next year, going into 2021, we could see an Official Cash Rate with a zero in front of it. () That will mean that mortgage rates, particularly fixed mortgage rates, for one-, two-year rates, are likely to drop closer to the three per cent mark.”
Bernard notes, "The banks do their biggest discounts for people who are fixing from anywhere from one to two years."
If you are thinking of selling or buying in the near future, Deborah offers some sound advice.
“Set realistic sale price expectations and, when you buy again, affordability is important. Don’t get caught in the trap of borrowing too much at low mortgage rates with low monthly repayments over 30 years, because future interest rate increases may put pressure on your budget.”
For many, renovating could be the ideal alternative to moving - without the stress of sales prices and mortgage rate increases.
According to financial advisors MultiplyWealt_h, now is a good time to use “cheap money” to your advantage, provided you are already in a stable financial position. Especially if you are mortgage-free, or are close to being mortgage-free, now is seen as a good time to invest in a home renovation. 
“You might be able to borrow more money for the renovation because the monthly repayments will be lower”, clarifies Deborah. “However, most banks consider affordability assuming interest rates were at normal long term levels – they also look at spending patterns and how much equity you have in your house.”
For those of you who are thinking of renovating in order to add value to your property, Deborah encourages caution.
“Improving a property will usually increase its value – as long as it was bought at a fair price initially. Be aware though that the RBNZ is stimulating the economy for a reason – it is slowing down! Inflation has been 1.6% pa for the last ten years - well below the 2% pa target. Also, the economies of our main trading partners China and Australia are slowing, tourism numbers are down and the clampdown on non-residents buying property has cooled the housing market. House prices are certainly more reasonable but don’t expect the huge gains seen in the 5 years to 2016 – it is hard to envisage house prices doubling in value again any time soon.”
If you have been waiting for the right time to borrow money to renovate your forever home, now could be the time - and Refresh can simplify the process. Refresh provides a 5-step process which covers every stage of your renovation; including project management as well as designing to your specifications and budget. If you need some financial support, we can put you in touch with our financial lending partner Harmoney, who make financing home renovations easy through peer-to-peer lending.  
If you’re ready to get started, or would like to find out more, get in touch today to arrange a free consultation with your local renovation specialist. 
**_Deborah is a Certified Financial Planner (CFP CM), a member of Financial Advice New Zealand (FANZ) and an Authorised Financial Adviser (AFA). She is a principal of independent advisory company Stuart Carlyon. This article does not provide personalised advice. Deborah’s Disclosure Statement is available on request and free of charge by emailing deborah@stuartcarlyon.co.nz.**
*Please note: All information is believed to be true at the time of publication and is subject to change.