Sur­viv­ing a mort­gage rates rise

In­crease could add hun­dreds of dol­lars in costs to many homes

Whanganui Chronicle - - Business - By Liam Dann

Could you han­dle the in­ter­est pay­ments on your mort­gage in­creas­ing by 30 per cent?

That kind of rise could be on the cards if rates fol­low their fore­cast path up­wards over the next year. We worry about the price of petrol, milk and av­o­ca­dos but if you own a house then there is noth­ing that com­pares with the im­pact of ris­ing rates on your fam­ily bud­get.

Af­ter years of record low rates — held down by cen­tral banks to keep the full hor­rors of the global fi­nan­cial cri­sis at bay — all the smart money is on them head­ing up. That has the po­ten­tial to add hun­dreds of dol­lars in costs to many house­holds.

In its lat­est quar­terly out­look, the NZ In­sti­tute of Eco­nomic Re­search (NZIER) picks rates are likely to rise over the com­ing year and cal­cu­lates that for many home­own­ers a rise of just 1.5 per­cent­age points in retail rates would be enough to lift in­ter­est pay­ments by 30 per cent.

So how se­ri­ous is the out­look? With some help from NZIER prin­ci­pal econ­o­mist Christina Leung, here’s a look at what’s be­hind the cost of your mort­gage pay­ments.

Re­serve Bank of­fi­cial cash rate (OCR): This is the in­ter­est rate set by the Re­serve Bank of New Zealand. It is in­flu­en­tial on mort­gage rates as most of the money lent by banks is bor­rowed lo­cally. The good news is it is on hold at 1.75 per cent and ex­pected to stay there for about an­other year. But the next move is ex­pected to be up. The Re­serve Bank’s own fore­casts see the OCR ris­ing by about half a per cent over the next two years.

US Fed­eral Re­serve funds rate: Un­for­tu­nately, lo­cal banks still go off­shore for about onequar­ter of their fund­ing. That means what hap­pens to in­ter­na­tional rates also has a big im­pact on your mort­gage The news is not as good for home­own­ers. The US cen­tral bank — the Fed­eral Re­serve — is hik­ing rates. So far the Fed has lifted rates six times since late 2016 — from and un­prece­dented low near zero. There is in­tense spec­u­la­tion about whether the Fed will hike two or three more times this year. Ei­ther way it is ex­pected to take the of­fi­cial rate from 1.75 per cent now to 3 per cent by 2020.

Global risk: An­other fac­tor in the lo­cal cost of bor­row­ing is the level of risk and fear in global mar­kets. When the stock mar­ket is boom­ing and pol­i­tics are pre­dictable, lenders are re­laxed. The mar­gins be­tween cen­tral bank (whole­sale rates) and retail rates are lower, so bor­row­ing is cheaper. When things turn to cus­tard — as they did in the GFC — lenders get risk-averse and the mar­gins widen. That raises the cost of bor­row­ing un­less cen­tral banks cut their rates sharply. In fact, Leung says, since the GFC, in­ter­bank lend­ing mar­gins have had a much big­ger in­flu­ence on what we pay here in New Zealand. In the­ory, the global econ­omy is sup­posed to be in good shape right now with eco­nomic growth in all the ma­jor re­gions. But po­lit­i­cal crises and fear of what will hap­pen as cen­tral banks hike rates are driv­ing in­creased volatil­ity. Lo­cal com­pe­ti­tion: Fi­nally, there is the down­ward pres­sure of lo­cal com­pe­ti­tion in the bank­ing sec­tor. For years the lo­cal banks were com­pet­ing to grow their loan books. Since we passed the peak of the prop­erty boom it is fair to say they have be­come more cau­tious about lend­ing. That has co­in­cided with tougher Re­serve Bank lend­ing rules.

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