Homeowners Need to Prepare for More Expensive Mortgages

NOTICE: Data released on Friday revealed that annual inflation had hit a 10-year high of 3.3%, beating all expectations and highlighting the fact that the economy is in turmoil right now.

Increases in food prices, construction costs and, of course, housing have contributed to a post-Covid surge in recent months, echoing a trend seen around the world as economies reopen, supported by the tailwind government stimulus measures.

Surprisingly strong inflation data emerged days after the Reserve Bank gave the clearest indication yet that it could raise interest rates, becoming one of the world’s first central banks to tighten monetary policy after the pandemic.

The Reserve Bank has announced its intention to withdraw its support for quantitative easing and, in its latest public statement, deleted a reference to the fact that it took “a lot of time and patience” to meet its inflation targets and jobs, fueling speculation about an imminent rate hike.

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* Kiwibank lowers two-year mortgage rate as other banks increase rates

Following comments from the Reserve Bank and much stronger than expected inflation data, financial markets began to anticipate a series of interest rate hikes to cool the economy and bring the inflationary beast under control.

The official spot rate – the New Zealand central bank rate – remains at 0.25%, a record high, but that is expected to change in the coming weeks. Markets are betting on three rate hikes in quick succession, starting next month.

Daniel Dunkley: “The official cash rate remains at 0.25%, a record high, but that should change in the coming weeks.

Provided

Daniel Dunkley: “The official cash rate remains at 0.25%, a record high, but that should change in the coming weeks. “

Banks have already started raising their mortgage rates early. Over the past week, New Zealand’s Big Four banks and competing banks such as Kiwibank, The Co-operative and TSB have raised their mortgage rates by around 30 basis points over several mandates. Further increases are expected if the Reserve Bank pulls the trigger.

Many economists and analysts are now predicting that the official exchange rate will rise to 1% by February and reach 1.5-2% next year. That would suggest at least an additional 1.25 percentage point added to many New Zealand mortgages, straining household budgets and impacting spending.

What additional cost could households assume?

According to data from the Reserve Bank, the last time the official treasury rate was 1.5% (in mid-2019), the average one-year fixed mortgage rate was 1.44 percentage points higher percentage at the average rate of one year today.

Using that difference as a rough guide, someone who buys Auckland’s middle house today, worth $ 1.15 million (with a 20 percent deposit and a two-year mortgage at 2 , 55 percent), could pay an additional $ 322 per fortnight on a 3.99 percentage rate.

Banks have warned borrowers to consider their exposure to rate hikes. In a recent ANZ report, strategist David Croy called on homeowners to budget for higher mortgage costs in their budgets. The bank’s analysis found that 76% of mortgage debt was either variable rate or had to be reset within the next 12 months.

Kiwibank economists have also raised questions about the large number of people exposed to rate hikes. The bank team suggests that 80% of mortgages need to be resixed by the middle of next year, “a huge chunk of resetting as we head into a tightening cycle.”

Kiwibank economists have expressed concern about the large number of people exposed to rate hikes.

Claire Eastham-Farrelly / RNZ

Kiwibank economists have expressed concern about the large number of people exposed to rate hikes.

Interest rates are expected to stabilize near historic lows, even when they rise. Still, the higher rates will pose a problem for the many people who entered the housing market during the height of this year’s market boom.

First-time buyers in Auckland in particular have taken on huge debt over the past year, with million-dollar mortgages far from rare. According to data from the Reserve Bank, $ 411 million was borrowed at a household debt-to-income ratio above six in March. In March 2019, only $ 73 million was loaned above this ratio.

The extent to which rate hikes threaten financial stability is unclear. The Reserve Bank noted that low rates have encouraged risk-taking in recent years. In May, the central bank said new borrowers were more vulnerable to rising rates and possible declines in house prices.

However, banks’ credit behavior should reduce the level of risk.

Borrowers and brokers have complained about the strict lending criteria in recent years, with lenders testing whether people can afford 6% or 7% loans before giving them the green light. The conservative approach of lenders should ensure that the pain is absorbed by those who can handle it.

In the absence of another Covid disaster or an unexpected disaster, higher rates and more expensive mortgages appear imminent. For borrowers accustomed to higher interest rates and those who bought before the recent market surge, there shouldn’t be too much reason to lose sleep.

For new entrants to the real estate market with massive mortgages, especially those in Auckland or Wellington, the increases may be a bigger shock. But it should be more of an unwelcome and uncomfortable budget cut than looming financial disaster.

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