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Business

Economist: Pay rises won't be enough to cover interest rate rise

30 Jan, 2017 04:34 PM3 minutes to read
Don't expect a pay rise to cover increased mortgage costs, an economist has warned. Photo/Doug Sherring.

Don't expect a pay rise to cover increased mortgage costs, an economist has warned. Photo/Doug Sherring.

Tamsyn Parker
By
Tamsyn Parker

Personal Finance Editor

VIEW PROFILE

Pressure on employers to boost workers' wages is not going to be enough to cover the rising cost of mortgage rates, warns an economist.

Daniel Snowden, who analyses retail and consumer economic data for the ASB bank, said mortgage rates were roughly back to where they were a year ago but in about 18 months time were likely to be higher.

"In 18 months time it will be particularly unpleasant for people rolling off two-year rates," Snowden said. Banks began lifting longer-term fixed mortgage rates at the end of last year and that has been followed by a flurry of increases in January.

Kiwibank has increased some of its fixed-term mortgages rates twice already this year and ASB also announced plans to increase its rates last week. While smaller banks SBS bank and the Co-operative Bank have also raised rates.

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The banks have blamed rising funding costs from borrowing money in the offshore market for the rate rises.

Snowden said a countering factor to the higher mortgage costs was pressure on employers to increase wages, which he expected to rise over the next 18 months to two years.

"That might help with some of the mortgage [increase] but won't help with all of it," he said.

Kiwibank economist Zoe Wallis said rising wholesale rates were having an impact on retail mortgage and deposit rates, causing something of a de facto tightening in interest costs that is already starting to hit borrowers in the pocket.

"With the majority of mortgages fixed for two years or less, rising interest rates are going to impact people much more quickly in the current cycle compared with when interest rate cuts happened back in 2008/09," Wallis said in a recent economic update.

David Boyle, group manager investor education at the Commission for Financial Capability, said some savvy mortgage holders had fixed their mortgage in the second half of last year for a longer period to help them weather rising rates.

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Another strategy to help cope with rises was to split your mortgage into several fixed terms so that any jump in interest costs would not be on the whole mortgage.

Cash-strapped mortgage holders could also consider stretching out the term of their mortgage although this adds to total interest costs over the life of the debt.

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In the past mortgages were typically taken over 20 or 25 years but that has been stretched to 30 years with rising house prices.

Boyle said people who have already stretched out the term of their mortgage to 30 years would have fewer options to cope with the increases.

"It gives them one less lever to manage the shocks and increases," he said.

Boyle recommended people calculate what a higher rate would cost them ahead of time to see what they could afford.

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