When you look at everything to do with your mortgages or buying your first home there is one issue that affects almost everything – inflation.
It’s something that is just there, but when you look at the impact of inflation it has a huge affect on not just first home buyers but mortgages in general.
Consider some of these:
Deposit – when your everyday expenses and rent are increasing you have less money left over and therefore it is harder to save your deposit. It’s also harder to grow your investments as many of those companies you may be invested in have had reduced profits too.
Income – you need your income to increase just to stand still. Normally when you get a pay increase you end up having more money to save, use to reduce debt or spend; but in recent times (and previously when inflation has been high) any increases seem to evaporate into just paying the extra living costs. You need a significant increase in pay to actually start really getting ahead.
Debt – if you are paying just the minimum on your debts or paying them without a real plan then it can seem to take a long time to pay them off. You really need to have some surplus money to make good headway and that’s often lacking in times of higher inflation.
Interest Rates – as we have seen, the Reserve Bank has increased the Official Cash Rate (OCR) to try and slow inflation and so we have had higher home loan interest rates too. They might not seem too bad and you may have done your own calculations and know that you can afford the home loan repayments, but the banks use a higher rate when they assess your ability to get a home loan and as they are pegged to the actual interest rates (about + 2.5%) then the banks may say that you cannot afford that home loan anymore.
Building Costs – with prices increasing so does the cost to build and that affects the end price of a new home, and therefore can often push up the house prices on existing homes or puts the brakes on developments which can leads to a shortage of houses in the months ahead. People are currently looking at house prices that have dropped and especially some areas where many new builds are being completed, but looking to the future there will be a real lack of new houses being built and that is likely to see an increase in those prices – house inflation.
As you can see, inflation can affect a lot of things and when you look at these together it’s not great for first home buyers.
To be honest inflation is an issue for most Kiwis and especially anyone that has a mortgage or anyone wanting to buy their first home.
What’s The Real Cost?
Let’s start by just looking at the increased interest cost.
We saw in the Reserve Banks announcement that they are expecting inflation to be back within the target range (1% – 3%) by the end of 2024, and while the OCR and home loan rates have not decreased yet we are hearing a number of economists predicting that home loan rates could reduce by approx 1% by the end of the year and then an other 1% by the end of 2025.
Assuming that the inflation target is met, then it’s not unrealistic to see interest rates of about 5.00% – 5.50% within a year.
We also know that the average home loan in New Zealand is $369,435 or for first home buyers is $555,635 (Canstar – December 2023) and so an interest rate reduction of just 1.00% will save the average first home buyer about $5,500 per year which is more than $100 per week.
That’s a significant saving – we just need to make sure that inflation comes down.
BUT – a lower interest rate also means that the banks should also reduce the test rate they use, and that means hundreds of people that are currently not able to buy a home will be given that opportunity.
