Home loan borrowers getting used to higher interest rates ‘new norm’

There are signs mortgage holders are coping with rising interest rates as Kiwis acclimatise to a “new norm” of higher repayments, a credit industry expert says.

The latest Centrix credit indicator report covering April showed home loan arrears declined for the first time in eight months.

Missed mortgage repayments fell to 1.27 per cent of the active population, down from 1.31 per cent in March, with 19,000 mortgages reported past due. They still remain below pre-Covid levels when they were 1.35 per cent in December 2019.

However, mortgage arrears have risen 25 per cent when compared with April last year.

“Many have seen new interest rates push their mortgage repayments up by hundreds, if not thousands of dollars a month, while budgets remain stretched thin,” Centrix managing director Keith McLaughlin said.

“However, there is some evidence pointing towards Kiwi households potentially starting to acclimatise to this new norm.”

There was some good news for mortgage holders last week with the Reserve Bank’s shock call that it still sees the official cash rate (OCR) peaking at 5.5 per cent, with cuts from the third quarter of 2024.

Some economists had predicted the OCR would need to be hiked to as high as 6 per cent after the Government’s not-so-frugal Budget.

RBNZ Governor Adrian Orr said at a press conference after the OCR announcement he didn’t expect to see any movement in fixed mortgage rates.

This didn’t stop two major banks – Westpac and ASB – from moving their home loan rates higher less than 24 hours after Orr’s comments.

Last month, Loan Market mortgage adviser Bruce Patten told the Herald while mortgage stress wasn’t a massive problem at the moment, a lot of loans were coming due in the next months.

“I expect it to worsen leading into the second part of this year,” he said.

Reserve Bank Governor Adrian Orr didn't expect mortgage rates to rise after the latest official cash rate increase. Photo / Mark Mitchell

RBNZ data shows non-performing housing loans for March 2023 was just $1.085 billion, or 0.3 per cent of banks’ non-performing loans.

That is bank loans that are subject to late repayment or are unlikely to be repaid by the borrower.

But the current average rate (fixed and floating) being paid on mortgage lending in March was only 4.7 per cent – lower than the between 6 to 7 per cent fixed rates currently being offered.

According to Centrix, arrears fell across other major credit types.

Overall consumer arrears fell slightly in April to 11.3 per cent of the active credit population, down from 11.8 per cent in March.

There were 411,000 people behind on payments in April compared to 427,000 in March. Year-on-year current arrears were 4 per cent higher compared to April 2022, but remain at historically low levels.

Buy now pay later arrears declined in April to 9.9 per cent, while credit card and unsecured consumer loan arrears fell month-on-month to 4.7 per cent and 9.1 per cent respectively.

Vehicle loans were the only credit type where arrears increased over April, up 5.2 per cent compared with the prior month and 24 per cent higher year-on-year.

“While it’s too early to tell if this is a sign of plateauing, it’s encouraging to see arrears growth slow for a month as people either get on top of their repayments or make arrangements with their creditors to get through these tough times,” McLaughlin added.

The dark side of slowing spending

RBNZ Governor Adrian Orr has been telling consumers to slow their spending in an attempt to bring down inflation.

So there may be little surprise then that businesses are starting to feel the pinch.

Overall business credit defaults were up 13 per cent year-on-year in April, with defaults up across all business sectors except transportation.

The construction sector struggled the most with defaults up 18 per cent year-on-year in April as firms contend with inflation and supply chain issues.

Retail and hospitality credit defaults rose 12 per cent and 10 per cent respectively.

Meanwhile, company liquidations rose 31 per cent year-on-year.

Company liquidations have been ticking up as Covid-related support that allowed some businesses to survive longer than they should have has since worn off.

This is supported by recent figures from the Companies Office which showed there were 374 liquidator appointments in the March 2023 quarter, a 20.3 per cent increase on the same period in 2022 (311) and 10.7 per cent higher than the first quarter of 2021 (338).

“While reducing spending is the goal of increasing the OCR, it remains a challenging time for Kiwi business owners,” McLaughlin said.

“Historically, the IRD [Inland Revenue] has been the main party to initiate the winding up of insolvent companies. While it seems they held back over the last couple of Covid years, it appears they’re starting to step up activity again.”