Homeowners who have stretched their budgets to get into the housing market in the past two years are likely to feel the squeeze as interest rates rise.
The Reserve Bank predicts floating mortgage rates will rise to 7 or 8 per cent over the next two or three years and says buyers who entered the market in recent years with small deposits will be disproportionately affected.
New Zealand's house price-to-income ratio is 26 per cent above its long-term average, according to the OECD.
Over the past year, the growth of household debt has outpaced income growth and the debt-to-disposable-income ratio is approaching historic highs.
In its recent Financial Stability Report, the Reserve Bank said recent low mortgage rates might have encouraged people to bid more for properties than they otherwise would. Low interest rates have made higher prices easier to bear. Without them, households may struggle.
Whangarei woman Tracey Kingi is already worried about her loan. "With the size of the mortgage, if rates went up 2 per cent, that's a $500 a month increase and that's not doable. It just will not fit."
She went to her bank, Westpac, this week to talk about fixing for two years at 5.95 per cent. In that time, she hopes to have saved a lump sum to knock off the mortgage, or to have had a pay rise or two.
Raewyn Fox, of the Federation of Family Budgeting Services, said it was a situation a lot of people were in.
"People are on a knife edge already. Even an extra $20 a week [in mortgage payments] means there's something they can't pay," she said. "Most of the families we're seeing have no fat in the budget. A lot of people haven't had a significant pay increase for the last two or three years."
Massey University banking expert David Tripe said borrowers would be in for a fright. "There is some question in my mind as to some of the marketing done by some of the banks.
"I have a strong suspicion that some people haven't really taken account of the risk, simply because they have been so enthusiastic about selling loans here and there."
ANZ's head of mortgages, Sarah Berry, said banks assessed customers' ability to pay higher rates when they issued a loan.
"All banks need to have the right conversations with customers to make sure they're prepared."
New Zealand Bankers Association chief executive Kirk Hope said banks would work with people who got into strife. He said unemployment was the biggest factor in mortgage stress.