The Tricky Job of Reducing Inflation
It’s common knowledge that inflation has been too high for too long in NZ.
And we’ve heard all the experts telling us that it’s a really bad thing.
But why is that?
How does inflation have a vice-like grip on our economy right now and why has it not gone down despite interest rates skyrocketing and households feeling the pinch?
Well, let’s look at that question now and explore how tricky the job of reducing inflation seems to be.
Why Is It Bad to Have High Inflation?
In New Zealand, the target inflation rate is between 1 – 3%. As of October 2023, the current inflation rate is sitting around 6%. Clearly, we are quite far away from the target window.
So, why is it such a bad thing for inflation to be high?
Well, there are several reasons why we can see the Reserve Bank working so hard to bring the rate down.
These are a few of the main ones:
Reduced purchasing power
High inflation takes away some of the purchasing power of our dollar. If prices continue to rise month on month, like we’ve seen recently, people find it increasingly difficult to afford the same amount of goods.
Effectively, the money you earn will buy less than what it did before. This can reduce your standard of living and quality of life.
It’s not only individuals that are impacted, but businesses also feel the pinch because high inflation leads to economic uncertainty. Consumers have less money to spend, so they delay making purchases other than essential items.
It is hard for businesses to operate under these conditions as they need people to buy their products to keep the doors open! When businesses have fewer people spending with them, they can’t plan as they don’t know when the funds will roll in again. This results in economic instability for the whole country.
Higher interest rates
High-interest rates are at the front of every mortgage holder’s mind. When inflation is high, the Reserve Bank tries to combat that by raising the OCR. As we’ve learned in the past, the OCR is one of the main considerations for setting mortgage rates.
When the OCR goes up, so do interest rates.
Higher interest rates can deter borrowing and spending as everyone is focused on having enough money available to keep a roof over their heads. This lack of money circulation negatively impacts the country’s economic growth and makes businesses hesitant to hire more people.
Basically, there is less money circulating through communities as everyone is prioritising servicing their mortgage.
Around these times, you might see your favorite small businesses closing as it is no longer financially viable to stay open with people spending less.
Why Is It Taking So Long for Inflation to Come Down?
Now we know why high inflation is a bad thing and why the government and the Reserve Bank are working hard to reduce inflation. But why is it taking so long?
Reducing inflation at any speed relies on:
Economic conditions: Inflation reflects supply and demand dynamics.
If demand is high and supply is low, it can take longer for inflation to come down.
We are seeing this in the marketplace as consumer spending is still high, partly because of migration increasing in the aftermath of Covid restrictions lifting.
Monetary policy: As we know, the Reserve Bank is doing its part to reduce inflation by raising the OCR.
However, it takes time for those changes to have an impact.
Because many NZ mortgages are on fixed term rates, the pain of increased mortgage rates can only be felt when those fixed terms expire, and a new interest rate must be fixed.
Expectations: Inflation expectations can impact the rate at which inflation reduces.
If people expect inflation to persist, they may request higher wages.
When businesses pay more wages, the cost of goods must remain high to cover these costs.
Suddenly, you have created a self-fulfilling cycle of inflation.
Only when the expectations change can inflation be reduced.
How Long Will This Current Situation Last?
Economists are confident that the high inflation war can be won. But it’s not something that will happen overnight.
As we know, the OCR remains at 5.5% after the Monetary Policy Committee chose not to increase it on 4th October.
This is because interest rates seem to be constraining economic activity and are starting to reduce inflationary pressure as required [source].
However, we aren’t out of the woods just yet. “Kiwi bank,” says the RBNZ’s plan is simple: lift interest rates to a point where they hurt, and hurt a lot, and then wait for inflation to be stifled and restrained to something more stable, like 2%.” [source].
With inflation currently around 6%, we have a long way to go.
“To tame the prickly inflation beast, monetary policy needs to be left at restrictive levels, for longer.
The RBNZ notes a prolonged period of subdued activity is required to reduce inflationary pressure,’ says Jarrod Kerr, Kiwi Bank economist [source].
The good news is that the probability of further OCR hikes has reduced.
It might be that the Reserve Bank has done enough to date to turn the tables on inflation.
If all goes according to plan, inflation will reduce in the coming months, and they can look to move the OCR down with more favorable borrowing conditions appearing in late 2024 or 2025.
However, this will depend on whether a further OCR hike happens in the upcoming 29 November 2023 review.
So, at this stage, we will await that announcement before making further predictions.
In this uncertain market, it is still our recommendation to seek advice from an experienced mortgage broker before making any decisions about your current mortgage or any potential borrowing.
Here at Oliver Broomfield Mortgage & Insurances, we specialise in giving personalised financial advice tailored to your individual situation and the current circumstances in the mortgage market.
We’d love to have the opportunity to discuss your mortgage needs as we might be able to create a better structure for your current situation.
Chat with our team to find out if that’s the case now.
Until next time,
Frequently Asked Questions
The advantage of using a mortgage adviser is that they can negotiate with a number of lenders to find the deal that best suits you. They do all the leg work for you, saving you time.
We help assess all your options, whereas the Bank is restricted by being only able to present one view.
While banks expect the client will negotiate with them, or accept the given rate, mortgage brokers are more likely to go to bat for you, to get a lower interest rate.
Our processes make financing your house purchase easy; providing quick personal service that takes the stress out of financing your home loan. With our wealth of experience in the finance industry, we know how to get the best deal for you.
Absolutely! We can still work with you using email, phone calls, and video calls. Whatever your financial situation is, we have a range of options to communicate with you whatever circumstances.
Yes, we have an online application system or a pdf form that can be completed. Supporting documents can either be uploaded directly into our system or emailed. We can use telephone, zoom, or email for further clarification or look at scenarios and receive and send information.
A home loan pre-approval is a conditional approval confirming that we can lend you a certain amount of money, provided the property you purchase meets the lender’s home loan criteria. It’s a good idea to ask us for a home loan pre-approval before you start house hunting. It will help you determine how much you can borrow and to give you some bargaining power when negotiating a purchase price.
Saving a deposit is probably the biggest hurdle for most first home buyers. First home buyers need to have saved at least 5% deposit with 20% or more being the optimum. Remember that this can be made up from a KiwiSaver first home withdrawal and some first home buyers may also be eligible for a HomeStart Grant. Gifts and deed of debts from friends and family are also common.
While there has been a lot of publicity about the need for home buyers to have a 20% deposit; there are still options available for you. We can talk you through what may be available to you including:
- The ability to access low equity loans
- Using your Kiwisaver contributions towards your deposit
- Building your own home
- Accessing parental assistance to increase your deposit.
The size of your deposit makes a big difference to the interest rate and the other costs you could potentially pay on your home loan. Generally, for lending where the deposit is less than 20%, the lender will also charge a Low Equity Fee (LEF) or Lenders Mortgage Insurance (LMI). Interest rates may also be higher for loans with a low deposit.
Whilst assessing a loan application, banks will scrutinise your bank account (usually the most recent 3 months bank statements).
In particular, they are looking at how well (or not) you manage your account.
Do you have dishonors, and or unauthorised overdrafts?
The better your account conduct the better your chances!
The banks also want to make sure all expenses including fixed and discretionary costs are included in the mortgage application expenses.
This will be determined by your income, your capacity to repay the loan, and the property type along with the current lending restrictions imposed by the reserve bank. Contact us today to find out.
The income you will need to earn will depend on the size of the loan, the bigger your loan the more you will need to earn.
As a rule of thumb if you are a first home buyer who is currently renting and have also been able to save some money there is a good chance you will meet the banks’ income criteria.
A LIM report is a summary of information that the local Counsel hold on a property. The report covers off information regarding consents, permits, code of compliance, potential erosion, subsidence, flooding of any type and the possible presence of hazardous substances. private and public stormwater and sewerage drain, rates, including any overdue rates.
Your solicitor should review this document.
Absolutely, we do this every day for many existing clients. We can use our scenario calculator to ensure you meet lender criteria and affordability for yourself.
Yes, you can borrow money in New Zealand and may be able to borrow up to 80-90% of the purchase price of a home.
To be eligible to for the KiwiSaver First Home Withdrawal Scheme you must:
Be purchasing your first home;
- Have been a member of KiwiSaver for a minimum of three years;
- Have your KiwiSaver account with a KiwiSaver provider that allows saving withdrawals; and
- Intend to live in the property for at least six months
- We recommend that you contact your KiwiSaver provider and check their individual policy on withdrawals for first homes.
- If you are eligible to withdraw money from your KiwiSaver, you may also be eligible for a first home deposit subsidy of up to $20,000.00 from Housing New Zealand – known as a HomeStart Grant.
Using a mortgage broker generally means no direct costs to you for their services but there are other unavoidable costs. These may include:
- A Registered Valuation ($800 – $1,200)
- Solicitor Costs ($800 – $1,500)
- LIM report ($150 – $400)
- Builder’s Report ($100 – $500)
- Weather Tightness Report for Monoclad houses ($300 – $1,000)
- Finance fee for non-bank lending (~1%)
Prices can vary. Always request a quote before ordering any of these services.
The banks all have different policies and risk tolerances. Buyers can get frustrated and waste a lot of time going to banks that won’t suit their needs.
Using a mortgage broker gives you a view of all the banks and their policies. It means you find the right bank faster and with less stress. With a mortgage broker, getting a mortgage isn’t complicated.
It’s about proving you have enough deposit and enough income and then heading to the right bank with that information.
Some tips to making your mortgage application easier: get your documentation sorted early and keep your spending as low as possible in the 3 months leading up to your application.
We will always act in the best interest of the client and will ensure that any deal we broker is the best we can do for the client.
While there can be variances in the amount different lenders pay us we do not favour any particular lender for this reason.
We are also members of NZFSG & Financial Advice New Zealand both of which have ethics that we must adhere to.
We can also be audited at any time by the FMA (Financial Markets Authority)
No… The lenders that use our services see us as an efficient channel to obtain business from. They only pay us on success i.e. when the loan settles.
We sit alongside their other channels such as a bank branch or mobile manager.
The cost of obtaining business from a mortgage broker is comparable to these other channels the banks choose to use.
For this reason, it will cost you no more to use our services.
Mortgage advisers (often called mortgage brokers) are paid by the bank when a mortgage is drawn down. If that mortgage is discharged (repaid and closed) within a short amount of time – typically 27 months – the broker must repay some or all of the commission (often referred to as a clawback). In this instance, the mortgage broker has essentially done the work for no pay.
We reserve the right to charge for our time if a clawback is incurred. The fee will be the estimated amount of hours the mortgage took at an hourly rate of $250 per hour. Unlike other fees, such as Break Fees from the bank, we have capped the amount we can charge clients at $2,500.
If you are refinancing or selling your house, the best thing to do is immediately talk to your adviser and discuss if any clawback fees will be charged.
If the property is for you to live in, this is something you should discuss with your Lawyer at your initial meeting. If it will be an Investment Property, you should discuss with your Accountant. We would also suggest you find a property accountant, someone who deals in property all the time rather than just as a side part of their business.
Refinancing creates an entirely new mortgage and an opportunity to restructure in a way that better suits your personal situation.
People refinance for lots of personal reasons, from changing circumstances to life goals and interest rates.
People often refinance with us because they want to get ahead faster and take advantage of the smart Go Home Loan structure and personalised support we offer.
The key to an effective loan structure is putting your savings and income into an account that helps reduce the daily interest costs of your mortgage, not a separate unlinked account.
Why? By combining all your income and savings against your Go Home loan, you’re making your money work harder for you.
A Go Home Loan is a much simpler mortgage structure that still uses your income and savings to reduce your daily interest costs.
Generally, banks offset your money from multiple accounts. Some clients find it difficult to track multiple accounts and figure out how much interest is being charged or offset.
We find that using a Go Home Loan is an effective loan structure by putting your savings and income into an account that helps reduce your daily interest costs.