Mortgage stress expected to double by early 2025 - RBNZ’s Financial Stability Report

Rising interest rates are yet to fully take their toll. Photo / 123RF

The Reserve Bank (RBNZ) warns mortgage stress is set to shoot up from relatively low levels, as high interest rates bite.

The banking regulator forecasts the portion of banks’ housing lending deemed “non-performing” will almost double by early 2025.

Non-performing housing lending, which was worth $1.3 billion in September, includes loans that are more than 90 days past due, or impaired – meaning the bank believes the borrower won’t meet their repayment obligations.

A silver lining is that the financial system is relatively strong and should be able to weather the storm – provided (among other risks) unemployment doesn’t rise by much more than expected.

Since May, the value of banks’ non-performing housing loans has been equivalent to 0.4 per cent of all their housing loans.

The RBNZ expects this portion to increase to 0.7 per cent by March 2025.

While this would be way above the 0.2 per cent mark the non-performing housing loan ratio has sat at in recent years, it would be below the 1.2 per cent level reached during the 2009 Global Financial Crisis.

The RBNZ included these forecasts in its latest biannual Financial Stability Report, released on Wednesday morning.

Mortgage holders are significant, as mortgage debt makes up 63 per cent of the $551b of loans on issue by New Zealand-registered banks.

The RBNZ noted that borrowers have so far been able to adapt to higher interest rates, as they’ve received pay rises and cut their discretionary spending.

Banks report that the arrears that have occurred to date have largely been associated with unexpected individual events, like illness or a job loss, rather than hardship due to higher interest rates alone.

However, the RBNZ noted more borrowers will run into trouble as they refix their debt on to higher rates and the pressure of these more costly repayments mounts.

The bank also made the point that the stress some mortgage holders are under may not be showing in the mortgage arrears figures referenced above.

It noted that recently borrowers with both a mortgage and other forms of debt have been missing repayments on non-mortgage debt to a greater extent than borrowers who don’t have a mortgage.

Just because households are prioritising their mortgage repayments over their other obligations doesn’t mean they’re in a good space. They could be skipping payments elsewhere.

The RBNZ made another important point – the pain isn’t evenly spread among borrowers.

Those who borrowed large sums in recent years will come under the most pressure.

The RBNZ estimated people who took out mortgages worth more than seven times their gross annual incomes in 2020 and 2021 are likely spending about half of their gross household incomes on mortgage repayments (paying the loan principal and interest).

Furthermore, it recognised that in 2020 and 2021, banks were testing mortgage applicants at interest rates below the levels mortgages are currently being sold at.

But on the upside, many borrowers didn’t take out as much debt as they could’ve when interest rates were at rock bottom.

Since 2022, banks have been testing applicants at rates above 8 per cent, giving them a buffer should rates move higher.

Taking a step back, the RBNZ recognised that because inflation remains high globally, there is a chance central banks will need to lift interest rates even more.

While the global economy’s adjustment to higher interest rates has been relatively benign so far, the RBNZ warned there are several tail risk scenarios.

“Key global risks in the near term include the possibility that central banks need to tighten monetary policy further, unanticipated impacts from previous tightening, potential spillovers from the current slowdown in the Chinese property market and escalation of the war in the Middle East,” it said.

The RBNZ will next review the official cash rate (OCR) on November 29.

Jenee 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.