Mortgage rates set to rise after OCR increase.

Mortgage holders can expect an immediate increase in floating mortgage rates, and brace for further rises following a rise in the official cash rate (OCR).

The Reserve Bank has lifted the OCR to 3 percent saying interest rates need to be at a level where they don’t add to demand, to keep inflation contained. Economic expansion, household and business confidence and persistent housing demand are among the reasons given for the rise.

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Another rise in the official cash rate expected this week.

Another rise in the official cash rate, to 3 per cent, on Thursday is seen as a virtual certainty. But the markets will be looking for signs that the Reserve Bank is having second thoughts about the pace and extent of monetary tightening still to come.

Westpac chief economist Dominick Stephens said the message would probably be the same as in March: The economy is gathering momentum, construction is booming, inflation pressures are building and therefore the OCR needs to rise.

The Reserve Bank made it clear earlier this year that it expects to increase the OCR by about 2 percentage points over two years.

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Interest rate peak poses risks to first home buyers

Economists say that interest rate rises could see first-home buyers spending two-thirds or more of their household income paying the mortgage. Household debt levels are high by historical standards and servicing costs relative to income will rise quickly as interest rates climb.

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