Rates rise threatens homeowners

One in five Australians could lose their house if they have to pay just 0.5% more on their mortgages

Some Kiwis could face losing their homes if interest rates rise but we are not as far under water as our Australian neighbours. Australian research has found one in five Aussies are walking such a fine line on their mortgage they could lose their home if mortgage rates were to rise by just 0.5 percentage points.

Christina Leung, an economist at NZIER said NZ households were not as leveraged as Australia’s but there was still “a large degree of risk there”.

Leung said Australia’s household debt to disposable income was around 200 per cent while New Zealand’s level was 160 per cent.

But NZ’s level was still higher than before the global financial crisis, which meant households were vulnerable to any change.

That could come from a change in the labour market or pressure from mortgage rates which have already begun to rise.

The highly leveraged were most at risk although the Reserve Bank had tried to mitigate that to some degree with the introduction of loanto-value ratios, Leung said.

It was hard to say how much of a rise in interest rates would put pressure on people without looking more closely at the composition of mortgages, she said. “As a sector as

As a sector as a whole it is vulnerable. But it is hard to quantify. Christina Leung Senior economist at NZIER

a whole it is vulnerable. But it is hard to quantify.”

Research showed those with high loan-to-value ratios were most at risk with those types of loans more likely to be held by investors. Firsthome buyers were less likely to walk away from a home compared to investors, she said.

Australia’s love affair with property has pushed that country’s residential housing market to an eyewatering value of A$6.2 trillion ($6.81t).

The analysis, based on extensive surveys of 26,000 Australian households, compiled by Digital Finance Analytics, examined how much headroom households have to rising rates, taking account of income, mortgage size, whether they have paid ahead, and other financial commitments. The results were distressing.

It showed that about 20 per cent of homeowners would find themselves in mortgage difficulty if interest rates rose by 0.5 per cent or less.

An additional 4 per cent would be troubled by a rise between 0.5 per cent and 1 per cent.

Almost owners ( 42 per cent) would find themselves under pressure if home loan interest rates were to increase from their average of 4.5 per cent today to the long-term average of 7 per cent.

“This is important because we now expect mortgage rates to rise over the next few months, as higher funding costs and competitive dynamics come into play, and as regulators bear down on lending standards,” Digital Finance Analytics wrote. Banks have already started increasing their home loan rates this year in Australia.