The OCR and its impact on renovation finance

What is the OCR?

OCR stands for the Official Cash Rate. It is a wholesale interest rate set by the Reserve Bank. Retail banks such as Westpac, ASB, and ANZ are all required to hold accounts with the Reserve Bank. The OCR sets the interest rates on the deposits and loans that registered banks have with the Reserve Bank. This affects the banks’ earnings and costs and influences how they set their deposit and loan interest rates for you as their customer.

Why is there so much talk when the OCR changes?

Adjustments to the OCR affect the operating costs for your bank. If the OCR rises, it makes it more expensive for banks to borrow money. If the OCR falls, it is cheaper for them to borrow money.

What does the changing OCR mean for me?

Changes in operating costs are usually passed on to customers. When the OCR rises, banks generally raise the interest rates on mortgages, personal loans, and business lending. On the other hand, if the Reserve Bank cuts the OCR, banks will usually lower those interest rates. Rising and falling interest rates affect the repayment amounts of your home renovation loan or renovation mortgage. 

Could I be paying more for my renovation?

If you have taken out additional lending from your bank to finance your home renovation – whether as a mortgage or personal loan – and the OCR rises, then yes, you could be paying more in interest costs. If you have a floating interest rate, you will see a rise almost immediately. If you are on a fixed interest rate, you will continue to pay the same amount for the term you agreed to. After that, your loan will be subject to the new, higher rate. It’s important to have a good understanding of your total renovation costs – including interest on loans – before you begin your project. 

Is a low OCR rate better for my renovation finance?

In short, yes. A low OCR rate means lower interest rates at your bank, which means you will pay less to finance your renovation, which this article details. The lower your home improvement loan interest rates are, the better for you. It’s always a good idea to brush up on your financial knowledge before investing in renovations. This A to Z of financial knowledge is a great start, while this article about getting your money working smarter explores offset mortgages, which can also help you save money if you are getting a mortgage to renovate a house. 

How much will my renovation cost? Do I need a loan?

Will you need a construction loan for a home renovation? It entirely depends on the scope of your renovations. That’s why it’s so important to have an agreed budget before any work begins, so that you can plan your finances accordingly. Our Waikato Renovation Consultants are expert project managers and will work with you to achieve your renovation goals within your budget. This article on how to estimate the cost of a home renovation project in the Waikato is a great read as preparation for thinking about your renovation budget. 

Need personal advice?

If you’re wondering how much your renovation will cost and need some personal advice, then talk to the team at Refresh Waikato. Find out what to expect here, then get in touch to arrange a free, no obligation consultation to discuss all your renovation needs.