The rising number of mortgages combined with historically low interest rates mean banks are busier now than a year ago, but what will happen if that climate changes? Is now the time to break your mortgage and refix, and have you got enough reserves in your budget to weather any future storm? Carmen Hall reports.
''Interest rate rises might be necessary within the next 18 months to keep consumer price inflation under control.''
That is the view of Infometrics Limited chief forecaster Gareth Kiernan, who said rising labour costs, labour shortages, supply chain disruptions and international shipping cost increases had put considerable pressure on the economy.
The likelihood of interest rates rising by more than about 1.5 percentage points in the next three years looked fairly limited, but if rates shifted from 2.3 per cent to 4.3 per cent it could mean fortnightly hikes of $150 to $300 for homeowners.
Data shows that assuming people fixed their mortgage at a one-year rate of 2.3 per cent and had a 30-year mortgage, the fortnightly repayments in the Bay of Plenty for all borrowers were $602, or $962 for first home buyers. Kiernan estimated these figures on new mortgage sizes of $339,200 for all borrowers or $541,800 for first home buyers.
However, Kiernan said one of the big risks associated with higher interest rates was that some people could struggle to service their mortgage.
At its most extreme, that outcome can lead to forced sales and house price falls, he said.
Tom Hartmann, lead for the Commission for Financial Capability Personal Finance, said it was important to shop around for interest rates because it was a highly competitive environment.
He said its online mortgage calculator on sorted.org.nz was a helpful tool that could work out the difference in rates and how long it would take to pay a mortgage off.
Another important concept to remember was that banks would reassess your situation and effectively you were applying for a new mortgage.
''Many people think that the bank can just, for example, hit their interest rates and make changes like that on the fly. But there is a lot more that goes on behind the scenes ... so they will do stress testing and run some numbers on the mortgage.
''So if the interest rates went up, how would the borrower fare?''
Having a buffer was the key, Hartmann said, but most people had more running room than they realised as the banks would have done their homework.
But Hartmann said when it came to housing affordability, New Zealand was still considered expensive.
ASB Private Banking, Wealth & Insurance senior economist Chris Tennent-Brown said it expects the RBNZ to start raising the 0.25 per cent OCR by May 2022.
''We believe we are at [or past] the low point for mortgage interest rates. Our forecasts suggest some modest upward pressure on all but the near-term mortgage rates over the rest of the year.''
Mortgage interest rates were influenced by a range of factors, including the RBNZ's OCR setting, developments in domestic and global fixed-interest markets, and other influences on bank funding costs.
He also said with retail mortgage interest rates and the underlying funding rates falling a long way over recent years, break costs are often significant.
Craigs Investment Partners head of private wealth research Mark Lister said in his NZME opinion piece last week that borrowers should keep a close eye on mortgage rates, and seek good advice on how long they should fix for.
''Don't bite off more than you can chew, and acknowledge that just as falling interest rates have been great for house and asset prices, a reversal of this trend would see that tailwind become a headwind.''
Kiwibank Borrowing and Investments product manager Richard McLay said its application volumes were up about 6 per cent on the same time last year.
He said breaking a fixed term was subject to a break cost, and these varied.
''They are calculated based on the loan balance, length of the fixed term remaining and movements in wholesale interest rates. Our customers are encouraged to weigh up the cost of breaking with potential savings to determine whether breaking their fixed loan is right for them.''
Keeping repayments the same would help pay off the loan faster and help protect them from potential interest rate increases in the future, he said.
Its lowest ever one-year fixed rate was 2.19 per cent per annum. The three-year rate was 2.99 per cent and rates were available to all home loan customers with 20 per cent equity.
Kiwibank also offered a refinancing package to cover some of the costs associated with switching banks, such as legal fees.
McLay said Kiwibank calculated the ability of the borrower to repay the loan at a higher rate, and if loans were split on to multiple fixed terms ''this can reduce the risk of higher interest rates and higher repayments over the medium term''.
An ANZ spokeswoman said the housing market was more active than it was at this time last year and home lending was more buoyant.
She said customer queries about breaking loans were low and currently its lowest rates were 2.25 per cent fixed for one year or 2.89 per cent fixed for three years.
ANZ might also offer a cash contribution towards the costs of their housing transaction, such as solicitor or valuation costs, she said.
Meanwhile, one mortgagee sale was completed in the 12 months to March 2021 compared to 16 the previous year.
''We will only consider mortgagee sales as a last resort when we have worked through all other possible solutions to assist our customer to resolve their situation.''
A Westpac NZ spokesman said it helped 3512 first home buyers into new homes in the six months to the end of March.
He said the bank had seen a small increase this year in customers seeking to break their mortgage, which was typical in the low-interest-rate environment.
''Like other banks, we run a stress test and price in a buffer to our mortgage offers, so that if interest rates go up the customer isn't faced with an inability to juggle their finances.''
This week Westpac introduced new six-month and 18-month rates that are joint-lowest among the major bank.
''It offers customers greater flexibility and value. We may also offer customers cash incentives on a case-by-case basis.''
Top tips when you're refinancing
• Shop around for the best rates
• Find out what refinancing will cost
• Calculate whether it is worth it
• Compare your options with your bank or broker
• If you're able to keep your repayments the same or even higher, refinancing at a lower rate will enable you to pay off your home faster with less interest overall
- Source sorted.org.nz