Mortgage holders paid $4.2 billion in interest in the June quarter. Photo / Alex Burton
The interest rates used to assess whether mortgage applicants can service debt continue to rise, with one bank now testing borrowers at more than 9 per cent.
In recent weeks banks have been lifting their mortgage rates, citing higher wholesale rates rather than a higher official cash rate (OCR).
This has seen them hike the rates they use to assess whether mortgage applicants can afford to service the debt they’re after.
ANZ’s current test rate is 8.95 per cent, ASB and BNZ’s are 8.75 per cent, and Westpac’s is 9.10 per cent. Kiwibank doesn’t make its rate public.
ANZ, ASB and BNZ tested mortgage applicants at rates of between 8.5 and 8.75 per cent the last time the Herald checked in with them in late-April. Meanwhile Westpac tested borrowers at 2.5 percentage points above the rate they were after.
In 2021, banks tested prospective borrowers at between 5.5 and 6.5 per cent – rates below that which banks are currently charging mortgage holders. For example, one-year fixed loans are being sold at around 7.79 per cent.
A borrower after a $500,000 loan would need to prove they had $4060 a month available to service that debt on a 9.1 per cent test rate over a 30-year term.
Meanwhile someone after a $800,000 mortgage would need $6500 a month.
Despite mortgage rates rising, there are signs the housing market might be thawing out.
According to the latest Reserve Bank data, banks’ new mortgage lending fell by 6 per cent between June 2022 and June 2023 to $5.7 billion.
New mortgage lending was much higher – at $8.5b – in June 2021, when the housing market was red hot, and slightly lower – at $5.4b – in June 2019.
CoreLogic chief economist Kelvin Davidson said the figures suggested the market might be turning, but it was still early days.
On a nominal basis, new mortgage lending fell by 3 per cent between May and June. But on a seasonally adjusted basis, it rose by nearly 8 per cent.
Davidson said the data aligned with other indicators, which showed sales were picking up and house prices may have bottomed out.
House prices broke out of an 18-month downtrend in June, rising by 0.7 per cent from the previous month, on a seasonally adjusted basis.
Davidson noted the Reserve Bank’s decision to slightly ease loan-to-value ratio (LVR) restrictions from June hadn’t spurred much more lending to borrowers with small deposits.
He believed servicing debt remained aspiring borrowers’ key challenge in the high interest rate environment.
While the portion of banks’ non-performing housing loans rose in May to 0.4 per cent, it was still well below 2008 Global Financial Crisis levels (1.2 per cent).
The impact of the rise in mortgage rates is visible in another data series published by the Reserve Bank.
The series shows that in the June quarter, mortgage holders paid $4.2b in interest – $384 million more than in the previous quarter and $1.4b more than last year.
First-home buyers continued to be less deterred by the tough conditions than investors and existing owner-occupiers.
They accounted for 24.4 per cent of new mortgage lending in June – a record high since at least 2014.
Meanwhile, investors continued their retreat from the market, accounting for only 16.5 per cent of new lending in the month. There have been times in the past when a third of new mortgage lending went to investors.
The Reserve Bank’s LVR rules mean nearly all investors need deposits of at least 35 per cent to get mortgages. Most owner-occupiers need deposits of at least 20 per cent.
The Government, in 2021, started limiting investors’ abilities to write off interest as an expense when paying tax. This is affecting their cashflows.
It also extended the bright-line test from five to 10 years, meaning investors who buy and sell residential property within 10 years need to pay income tax on any gains received.
Exemptions apply to all of the above, including for new builds.
Davidson believed investors, in particular, might take a further knock if the Reserve Bank decided to impose debt-to-income restrictions on banks’ mortgage lending.
These would be imposed to maintain financial stability and would restrict the amount of debt banks could issue borrowers with relatively low incomes.
The Reserve Bank has told banks to prepare their systems for the restrictions to possibly be imposed anytime from April onwards.
The regulator might loosen LVR restrictions if it introduced debt-to-income restrictions.
Coming back to the near term, mortgage broker Campbell Hastie believed activity might pick up in coming months.
He noted the loosening of the Credit Contracts and Consumer Finance Act (CCCFA) in June has meant banks can be more flexible when they run the ruler over prospective borrowers’ spending.
Previous changes to the CCCFA meant banks had to assume someone’s discretionary spending would remain the same once they took out a mortgage.
However, under the loosened rules, a bank can consider the fact someone might cut their spending on nice-to-haves, like gym memberships and takeaways, to meet their mortgage repayment obligations.
Hastie believed the rule change was material for some people.
Looking at the big picture, ANZ economists forecast a 3 per cent rise in house prices over the second half of 2023.
However, they caution the Reserve Bank is engineering a recession to tame inflation. If it doesn’t achieve this with an OCR of 5.5 per cent, it will lift the rate again.
“That’s likely to lead to renewed upwards pressure on mortgage rates later in the year, and could even see housing headwinds dominate tailwinds as we head into 2024,” ANZ economists said.
Jenée Tibshraeny is the Herald’s Wellington business editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
ANZ stopped accepting deposits into others' accounts last year.