Interest Rates

Okay the Reserve Bank has lifted the Official Cash Rate to 7.75%. This is 325 basis points higher than the 4.50% in 1999. Since January 2004 it is the 11th consecutive increase.

What has this done to retail rates?

The data is from the Reserve Bank of New Zealand, except for April 2007 which is a projection based on the latest OCR increase.

Basically one is going to be paying 3,5% more on your mortgage than in 1999. Now what does this mean for the average family who has a mortgage? It can mean two things.

If the family is well off, they keep their repayment schedule the same, and just pay more every month. If they are not so well off, they pay back their loan over a longer period.

Let’s look at both scenarios for say a $150,000 mortgage and a $350,000 mortgage.

Now in the better off scenario, you just pay the extra interest. Now on the $150,000 mortgage this is an extra $437.50 a month. For the $350,000 mortgage it is an extra $1,020.83 a month.

For the second scenario, we go to Sorted. For the $150,000 mortgage we assume you are paying it off over around 15 years at $1,300 a month. At 6.5% you pay it off in 15 yrs 2 mths with a total interest bill of $77,384. At 10.0% you pay it off in 32 years and nine months with a total interest bill of $281,033.

The $350,000 mortgage is even worse. At $3,000 per month at 6.5% interest it is all paid off in 15 years and six months. At 10.0% it is 36 years. 6.5% has $184,072 of interest while 10.0% has $718,005 of interest.

Even if one can do $3,500 a month at 6.5% it is paid off in 12 years 1 month, at 10.0% it is 18 years. The interest increases from $142,970 to $355,678.

So that is a lot of pain coming. No wonder the Government wants cross-party talks. They’re not about finding solutions – just sharing the pain.