What 0.25% means

March 14th, 2014 at 7:00 am by David Farrar

As was inevitable, the official cash rate went up to 2.75% yesterday. Having go up makes it hard for those with mortgages and increases the cost of borrowing for businesses. But the alternative is letting inflation get out of control, which really harms people on low and fixed incomes. High inflation will not in the long term lift economic growth.

If someone has a $400,000 mortgage 25 year mortgage, then an extra 0.25% on a say interest rate sees the weekly repayments go from $594 to $608 a week. So one increase doesn’t impact a lot, but many of them will.

2.75% is still a historically very low rate. In 2008 the ocr peaked at 8.25%. An ocr of 8.25% might see mortgage rates of 11.75% which has weekly repayments at a staggering $954 a week.

 

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35 Responses to “What 0.25% means”

  1. duggledog (1,580 comments) says:

    What it means is harden the f*** up. I was paying 15.5% on my mortgage in the late eighties and it went higher than that.

    Now would be a great time for National to remind younger people of those times and how we ended up in that position, for every action has a reaction.

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  2. NK (1,253 comments) says:

    It amazes me how this country is besotted with the OCR these days. It never really used to be much of an issue but these days it’s soooooooo important.

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  3. EAD (1,285 comments) says:

    The one thing I fail to understand is why people “of the right” proclaim to like free markets yet don’t see anything wrong with Central Banks fixing the price of money and as such, every single price in the economy. Because if you think about it, interest rates are nothing more than the ‘price’ of money – it is the rate that people pay when they ‘demand’ money in the form of loans based on the supply of money available.

    This price of money affects the prices of shares in the stock market. Oil. Agricultural commodities. Real estate. Automobiles. Almost everything we touch is affected by interest rates.

    So in setting the price of money, we have given Central Bankers the power to effectively set the price of……everything.

    Make no mistake, this is a form of price controls. And there’s not a doubt in my mind that one day (probably soon), future historians are going to look back and wonder how so many people could be so bamboozled.

    We have somehow been conned into believing that the path to prosperity is for the grand wizards of the Central Banks to set the price of money rather than billions of autonomous individuals making their own decisions as to what the price of money should be.

    Yet this notion of ‘money backed by nothing’, controlled by the state is an absurd fantasy that has failed every single time it has ever been tried before in history.

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  4. alex Masterley (1,523 comments) says:

    duggledog,
    Agreed.
    In my early days as a lawyer circa 1987, RSL was charging 19-20% interest.
    The most I have seen since I became a property owner was high 9’s.
    People have short memories

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  5. duggledog (1,580 comments) says:

    The simple trick is to keep debt down. Then you can shield yourself to some degree from interest rate hikes. The other trick is to marry well, if you want to do the whole house, kids thing, and purchase what you can AFFORD.

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  6. Lucia Maria (2,606 comments) says:

    EAD, well said.

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  7. EAD (1,285 comments) says:

    Thanks Lucia,

    Economic growth used to be about productive capacity. You grew by saving, investing, becoming more productive and then trading more and prices would come down as Producers became more efficient (as is still the case with modern electronics whose rapid technological advancements can even exceed the continual growth of the fiat money supply). As people saved more, interest rates would come down naturally as a larger SUPPLY of savings meant that naturally the interest rate would come down or conversley go up if Savers didn’t save as much of their surplus capital.

    Today, it’s much simpler and self proclaimed economists think they don’t have to worry about Economic Law. You don’t need to become more productive and create Capital from savings, you just lower interest rates, borrow more, spend more and allow a Central Banker to determine the interest rate for the entire economy!

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  8. Colville (2,298 comments) says:

    duggledog.

    OMG..you mean its not a RIGHT to purchase a 4 bed 2 bath 3 living areas NEW brick/ali/tile house on a landscaped section close to town as a FIRST HOUSE?

    you mean a young couple might need to buy an old skanky place and actually have to get dirty cleaning it up? ewwwww!

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  9. Nostalgia-NZ (5,272 comments) says:

    When will they give up ‘fixing’ cash rates EAD?

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  10. duggledog (1,580 comments) says:

    EAD, I don’t see where you’re coming from unless you think there’s going to be a single global currency. Different currencies have different values to different people with different habits in different countries

    Strong economies (say Germany) would loan money to poorer (or rather irresponsible) economies like, say, Greece, except with much higher interest rates than they would to someone else, to dissuade reckless borrowing and spending

    Well they would in the old days. Now look what’s happened.

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  11. Judith (8,534 comments) says:

    @ EAD

    How I wish you were a politician – this country needs people that make sense like you do. Thank you for your comment. :-)

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  12. Harriet (5,105 comments) says:

    If you can’t afford rate increases, then you simply borrowed to much to begin with.

    Borrowing is all about risk – the risk of losing your job, the risk of rate increases, ect.

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  13. Alan (1,087 comments) says:

    The whole “i was paying x% back in the day ” meme is bullshit.

    High interest rates are a result of inflation, inflation destroys capital and debt. Wages move in track with inflation. When inflation is high, it’s correct to borrow to purchase assets. Also house prices were much lower in terms of percentage of wages.

    You may have been paying x% (and so did the rest of us), but it produced a wealth transfer from savers to borrowers.

    The idea that we had it harder back in the day is a nonsense, a few tough months, sure. But middle aged people who owned property 20 – 30 years ago on the whole made a killing (tax free).

    Young people today have it much harder than we ever did, high prices and no inflation to destroy debt.

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  14. Harriet (5,105 comments) says:

    Ead – your first post is only true for people who borrow money – not the entire economy!

    Infact, those businesses which don’t borrow money[all else being the same] should be able to sell their products cheaper as they have no borrowing cost. Central banks therefor do not by default set the price of ‘everything’.

    If you don’t believe me – then hold a garage sale – while still paying your mortgage. :cool:

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  15. Odakyu-sen (732 comments) says:

    If your mortgage rate rises, from 5.75% to 6.00%, that 0.25-point increase translates into a 4.3% increase in interest payments. (6.00 / 5.75 = 1.04347). If rates were to rise from 5.75% to 7.5%, that would equate to a 30.4% rise in interest payments. And that’s a (7.5 – 5.75 = 1.75-point) interest, which seems small to many people until they actually start to think about it. A mere 1.75-point increase means you’re shelling out 30.4% more in interest (1.75 is 30.4% of 5.75)

    The interesting thing is that in the “old days,” a mortgage might have been around $150,000, but today, they may be easily triple that. I recon that a 30% increase in interest outgoings would hit a lot harder when leveraged by a thumping-great $450,000 mortgage, compared with a $150,000 one.

    My point is this: we may not be facing the double-digit interest rates of the 80s, but the principles borrowed are so much larger nowadays that a jump in interest rates, even a small-looking one, will have a tremendous impact on weekly repayments. And since the terms of these mortgages can be for decades, it’s going to really put a dent in some people’s lifestyles.

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  16. Neil (588 comments) says:

    I happen to think that the increase is a badge of honour to New Zealand. Our Central Bank, not the government, has indicated that we have our economy running well. Some countries are still talking about more stimulation, weakening the value of their currency. Conservative approach necessary.
    Granted exporters are having a hard time, however they have developoed efficiencies to soften this problem.
    Ironic to hear Helen Kelly of the CTU bemoaning the rate rise of 0.25%. Imagine two years down the road with no increases,inflation running at 8-9% and prices escalating.

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  17. Akld Commercial Lawyer (165 comments) says:

    As I have come to expect, the mathematics in this thread is somewhat better than one finds in the MSM. I had the misfortune to arrive home in time for the One News last night and one vox pop explaining that they would not be able to afford a heat pump because the hike in the OCR was likely to equate to the $100/fortnight required to pay for it. And non one bothered to ask if they had borrowed $1,040,000 – or why, if they had, it left so little freeboard that $100 a fortnight was the tipping point.

    And the knock on point with the thread above – if the OCR triggers interest rate rises all the way to 7.5% (which RBNZ figures and BNZ commentary suggest it might by late 2016/early 2017) then those with $450k borrowings are going to need to find another $300/fortnight.

    As a first home buyer in the early 90s, with the double whammy of high interest rates and tough lending criteria (my, then, bank turned me down despite having over a third deposit), it was necessary to do a sort of sensitivity analysis to see a what point an interest rate spike would lead to a diet of bread and dripping.

    And no discussion about interest rates would be complete without looking at household incomes. Today’s new entrants to the workforce, especially graduates, are in a radically different position. The handbrake for many is their level of student debt.

    The bottom line, is that we can’t have it all – if the cost of not facing a spike in domestic inflation, and having food and and costs start to ramp up, is a bit of domestic fiscal constraint, then my vote goes to the RBNZ. They have signalled this was coming from a long way out – and thus gave the market plenty of time to adjust. The belt-tightening should have begun some time ago for those so highly-geared that they will have to radically curb their spending.

    And the party threatening to mess with the RBNZ Act have zero economic credibility. They are prepared to peddle a bunch of lies, starting with the Power NZ whoppa.

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  18. Keeping Stock (10,405 comments) says:

    When my wife and I got our first house in 1982 we had a Housing Corp first mortgage at 21% and a second mortgage from an insurance company at 24%. It was bloody tough, but it was the only way we could get on the property ladder. First home buyers today seem to want location, quality and top of the range housing, without compromising their lifestyles at all. Short of winning Lotto, that’s simply a pipe-dream.

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  19. dime (10,094 comments) says:

    Yes, we know rates were 15- 20%+ in the early 80’s.

    And of course back then the houses still cost 600K +. right?

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  20. dime (10,094 comments) says:

    If we had rates of 11.75%, it wouldnt last long. We would have our own housing crisis/collapse.

    Imagine where the dollar would be? jump from .85US to about 1.30US.

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  21. Kimble (4,443 comments) says:

    If you bought your house, taking on a 25 year mortgage, relying on interest rates staying at 2.5% then you are too fucking stupid to own property and deserve to lose the house.

    In fact, hand in your drivers licence as well.

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  22. Grendel (1,003 comments) says:

    I got called up by a breathless reporter wanting input from an expert for what people should do if the rate rise would be of concern to them.

    he got a little less excited when i said that if you had your entire loan on floating and a $4.80 a week (per $100 000 floating) would knock you out, then you need to look at your overall budget.

    when he asked how should people plan etc, again i said, if your budget is so tight that random small increases will seriously impact it, then you need to fix now, and stop trying to play clever buggers with the rates. certainty is more important than trying to time the rates (which you will probably screw up anyway).

    and i agree that people have short memories, clients that were ecstatic when i told them we got a discount down to 9.4% a few years back are bitching about it ‘being as high as 5.6% today’). no sense of perspective.

    the bit the news guy definitely left out of the article, when i said, that interest rates have never and will never have anything to do with paying back a loan, they are simply the premium for borrowing. if you want to pay your loan off faster, get advice and structure it properly.

    its said week when $4.80 a week is big news.

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  23. NoCash (258 comments) says:

    When I bought my house back in 2002, I did a stress test based on an interest rate of 10% to determine how much I should borrow.

    If I was to take on a new mortgage now, I would use an interest rate of around 8% for the stress test given that times have changed.

    So if people are budgeting based on an interest rate of around 6% and borrow to the hilt, then they have no one to blame but themselves.

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  24. Kimble (4,443 comments) says:

    Yes, we know rates were 15- 20%+ in the early 80′s.

    And of course back then the houses still cost 600K +. right?

    This.

    Servicing the mortgage on your house in the 80’s took up a far smaller proportion of your income.

    All the more reason to consider the possibility that maybe record low interested rates may not be sustained over the 25 years of your mortgage.

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  25. ross69 (3,652 comments) says:

    the alternative is letting inflation get out of control, which really harms people on low and fixed incomes

    Yep the Right is very concerned about those on low pay. Remind me again how many kids are living in poverty?

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  26. Kimble (4,443 comments) says:

    Remind me again how many kids are living in poverty?

    Fewer than if inflation was to increase.

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  27. ross69 (3,652 comments) says:

    Fewer than if inflation was to increase.

    Wrong.

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  28. ross69 (3,652 comments) says:

    Just a reminder – productivity has increased more than 80% since the early 80s while real wages have fallen 25%. Yep the obsession with inflation has really helped workers!

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  29. dime (10,094 comments) says:

    “Yep the Right is very concerned about those on low pay. Remind me again how many kids are living in poverty?”

    Worldwide or in NZ?

    If NZ – 15.

    There are a bunch of other kids with shitty parents who go without which is a shame.

    Remind me again ross – how much do you give to charity a year? what percentage of your income? Or do you just pay extra to the IRD? OR do you expect other people to fund what YOU think is right? even though people who think like you number about 5% of the population.

    go fuck yourself

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  30. Manolo (14,026 comments) says:

    @Comrade ross69: That is the key word, workers.

    NZ has too many loafers, idlers and bludgers receiving a handout. Those whom your beloved party, socialist Labour, want to give even more free money.

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  31. Harriet (5,105 comments) says:

    “…..Remind me again how many kids are living in poverty?….”

    They’re kids – feed -clothed – and sheltered. Education paid by us all. Hospital paid by us all.

    Zero ——– according to Maccas international index. :cool: :cool:

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  32. Kimble (4,443 comments) says:
    Fewer than if inflation was to increase.

    Wrong

    Wrong.

    I will make it easy for you.

    Explain to the universe how people on a fixed income are better off or not affected at all when prices increase.

    Failure to do so will complete your utter humiliation.

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  33. igm (1,413 comments) says:

    ross69: There is no poverty, it is a term used by leeches of society, too tired to work, sitting on their arses envying those who have been out and achieved. These leeches are bringing up another generation to follow their own irresponsible immoral habits, expecting taxpayers to give them another handout because they have committed their income to drugs, booze, pokies, and debauchery. Take a look around Otara, Taita, Porirua, Mangere, etc., on benefit days, the pubs are full. This is not poverty, it is wasting overpaid benefits by those who are typical Labour/Green supporters.

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  34. Lucia Maria (2,606 comments) says:

    I don’t have an issue with the interest rates going up, if that’s what the market pressures are. However, this is an artificial increase by the Government, even though there is a small degree of separation there. As EAD said near the beginning of this thread:

    The one thing I fail to understand is why people “of the right” proclaim to like free markets yet don’t see anything wrong with Central Banks fixing the price of money and as such, every single price in the economy.

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  35. seanmaitland (501 comments) says:

    @dime – a 600k house today would’ve been 200k in the late 80s, if you are looking at average homes.

    21% interest payments on that on a 1980s salary would be hard work.

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