Pain coming, with interest-rates spike biggest in quarter century
Many with big home loans face far heavier mortgage repayments
New Zealand is undergoing the biggest spike in interest rates the country has seen for 25 years, says Kelvin Davidson from CoreLogic.
That means pain is coming for many people who have taken on large home loans, with “a huge wave of refinancing” due to get under way, says the insights and analytics company’s chief economist.
About half the country’s mortgages are fixed and are due to refinance in the next 12 months.
Mortgage brokers spoken to by OneRoof report the pain is already happening and that some of the FOMO (fear of missing out) buying of the last couple of years could come back to bite people.
While brokers say most people should be able to cope with the higher rates, given banks assess serviceability at higher rates anyway, Stephen Robertson, from My Money, says gutted clients told him yesterday they were pulling the plug on their home.
“These were two friends who had scrimped and saved to afford a first home together in Auckland who have decided to sell because they can’t afford the higher rates.”
With the cost of living and discretionary spending so tight, broker Cameron Marcroft from Loan Market said people may have to make tough life choices in the next few years, such as delaying having a family.
Davidson said house price rises over the years meant people had taken on huge debt. He analysed twoyear fixed rates going back to 1998 when they were 9.8 per cent.
While that is much higher than the current rates of about 5.5 per cent (using an industry average “standard” loan rate), and the projected rise to about 6.5 per cent next year, house price jumps mean debt is much higher so interest rate rises hurt more.
“Obviously, any new borrowers over the coming months will be facing much higher interest rates than before, too.
“We don’t have the affordability numbers back to 1998, unfortunately, but in early 2004 the house price income ratio was five — now it is nine.
“That’s why we’re more sensitive to interest rate changes, because house prices are higher, debts are higher.”
In 1998, when the loan-to-income ratio was lower, people could stomach the higher rate a bit more easily.
Many people who bought in the last couple of years fixed their mortgage when the rates were at record lows after Covid arrived in New Zealand, but with rollovers due, they will be repaying thousands upon thousands of dollars more. Someone who bought a $1m home last June, for example, on a standard two-year fixed term rate of 3.5 per cent for 30 years, was paying $43,000 a year, but if they fix again next year at a rate of potentially 6.5 per cent they will pay $60,000 — an extra $17,000, Davidson says.
There will be people who are on different rate terms or who have managed their mortgage well but there will be others who are in for a shock.
“There was a reasonably sharp increase in interest rates just prior to the Global Financial Crisis (in 2008) but this will be bigger than that — this is the biggest adjustment that people will have to get used to that we’ve seen in 25 years.”
Recent borrowers are more exposed but anyone with a big mortgage will potentially hurt, he says, and for some there is also a psychological element as some people may not have fully comprehended interest rates trending down can also go back up.
“There’s a whole generation of borrowers who have never seen interest rates go up so it’s not only the dollars you’ve got to pay but also the mindset shift — ‘what does this mean for everything else in my life’?
“If you now have to direct a lot more money towards your mortgage — we’re talking thousands of dollars here — you can’t spend up on other things, and other things are going up in price as well.
“Even without the mortgage rate interest change there’s a huge squeeze on people’s incomes through higher food, petrol, everything else.”
But there is also light at the end of the tunnel, Davidson says, with the
Reserve Bank talking about interest rates falling once inflation is under control, although that’s unlikely before 2024.
Davidson and mortgage brokers say people tend to prioritise paying the mortgage over other spending, and because banks assess serviceability on a higher interest rate they should theoretically manage.
Marcroft agrees that most people can survive interest rate hikes if they change their mentality on spending.
“If people adapt to the change they will be fine. If people don’t adapt . . . then they are going to struggle on the mortgage repayments.”
One option for people coming up to their rollover period is to look at fixing for a longer term, such as a threeyear rate in the low 5 per cents.
“If you still had a few more months to go on your two-year rate at 2.something, I would be breaking that now and looking to refix for a longer term, just to make sure you get a better rate than you would in say two or three months.”