Rates are falling – what does that mean if you’re looking to build?
This month’s bigger-than-expected OCR cut caught most people by surprise, following softer GDP results and signs that the economy is slowing faster than the Reserve Bank had hoped.
The good news for borrowers is that it’s already flowing through to lower mortgage rates, and it’s starting to make a real difference for anyone looking to build.
Test rates have plummeted, making it easier to borrow more from the bank
When banks assess new lending, they apply what’s called a “test rate”. This is the rate they use to check whether you can still afford the loan if rates were to rise. At the peak, these test rates were sitting close to 9%, which made it much harder for people to get the approval amounts they were hoping for. Most of the main banks are now testing around 6.5%, which translates to noticeably more borrowing power for buyers and builders.
Lower floating rates having a positive impact on new build customers
On top of that, most banks have passed on the majority of the OCR cut to their floating rates, which is particularly helpful for people building new homes. That’s because while most buyers will fix the land loan once it settles, the build portion of their lending typically remains on a floating rate. This means the interest costs during construction are now much lower than they were just a few months ago.
We also saw banks trimming their fixed rates in anticipation of this cut, but because the reduction was larger than expected, further drops are likely over the next few weeks. Economists are already predicting at least one more OCR cut before the final announcement of the year in November.
All of this makes it a great time to be a home loan borrower, especially for those looking to build. New builds remain exempt from the DTI (Debt-to-Income) restrictions, and with test rates easing, we’re seeing both investors and families revisiting new builds as a more achievable option.
If you’ve been sitting on the fence about building, now’s a good time to revisit your numbers and see how the latest changes might work in your favour.
Building or planning to build? Feel free to reach out. We can help walk you through what’s required from a finance perspective and make sure you’re getting the best rate for your mortgage.