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Tamsyn Parker

Money Editor for NZ Herald

Big banks 'stress test' mortgage borrowers

Lenders want to ensure home owners can meet repayments with higher interest rates

A BNZ spokesperson says stress-testing is common practice for NZ banks. Photo / NZ Herald
A BNZ spokesperson says stress-testing is common practice for NZ banks. Photo / NZ Herald

Major banks are "stress-testing" mortgage borrowers to ensure they will be able to meet repayments when higher interest rates hit.

Higher-than-expected inflation data for December has prompted some economists to call for the Reserve Bank to increase the official cash rate at its first review of the year next week.

If that doesn't happen an increase in March is seen as very likely and economists are predicting an increase of 125 basis points by the end of the year.

That would push the OCR up to 3.75 per cent and could mean banks lift their floating interest rates to about 7 per cent.

On a $300,000 mortgage that would increase monthly mortgage payments by more than $200.

In Britain, pending mortgage rate increases have prompted its financial market regulator to introduce new rules in April forcing lenders to "stress test" potential clients to see if they will be able to afford potentially higher monthly costs.

Banks here say they already test borrowers' lending capability.

A spokeswoman for the BNZ said it was common practice for New Zealand banks.

"As a responsible lender we've been applying a similar type of 'stress test' for a number of years now.

"When calculating a customer's ability to service their loan, we use a standard interest rate, which is higher than the advertised rate.

"This rate is regularly reviewed and is based on analysis of historical rates as well as interest rate forecasts."

The bank would not reveal the rate as it was commercially sensitive.

Westpac said it also built in a buffer. "As a responsible lender our decisions are based on a range of factors, including a buffer in the borrower's capacity to repay a loan in the event of future rate increases," a spokesperson said.

ANZ said its prospective clients had to complete a budget to ensure they could afford the new lending.

"The applicant's income must be sufficient to cover all commitments, including the proposed home loan. This includes the application of a margin to ensure that the applicant's income will still cover all commitments should interest rates increase," it said. "This margin is reviewed regularly and adjusted taking into account market conditions."

Shaun Drylie, ASB's general manager of products and strategy, said it used a projected long-term interest rate to assess affordability.

Massey University banking expert David Tripe expected banks to account for some margin in increased rates but said it was hard to know how much they would build in.

"I don't necessarily have confidence that common sense over-rides market imperative," he said.

As of November last year, $140 billion of New Zealand's total $189 billion residential mortgage debt was on either floating or fixed for less than one year. Tripe said he expected it to take a while for any problems to emerge from rising rates.

Banks may hold off rate rises

Banks may not pass on the full amount of the first official cash rate rise to floating mortgage rate customers, according to a Massey University banking expert.

David Tripe said there was a certain amount of slack in floating rates which could give the banks some wriggle room.

"Funding costs for the banks have been sneaking down and banks haven't adjusted their floating rates down. It would not be impossible that banks didn't increase the floating rate by the full official cash rate change on the basis there is some slack there."

But he said it would also depend on market dynamics and what banks were doing to compete with each other.

Bank economists are predicting the official cash rate to go up by around 125 basis points this year which would push the official cash rate to 3.75 per cent from 2.5 per cent.

Westpac economist Michael Gordon said he couldn't predict whether banks would continue to keep the same margin between the OCR and floating rates as the official rate rose.

"Floating rates are most likely to reflect the OCR but margins settle where competition dictates."

- NZ Herald

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