Government won’t support stressed mortgage holders

The Reserve Bank says a quarter of the current stock of mortgage lending was originated during 2021.

Mortgage holders struggling to meet their repayment obligations won’t be among those who get government support in the upcoming cost-of-living-focused Budget.

Finance Minister Grant Robertson told the Herald that supporting this group of people, including recent first-home buyers, was not on the Government’s work programme.

His comments came as the Reserve Bank (RBNZ) said it wasn’t seeing “widespread distress” among households and businesses on the back of it aggressively lifting the official cash rate (OCR).

However, it expected more people to fall behind on their repayments this year, as borrowers refix their mortgages at higher interest rates and the economic slowdown the central bank is orchestrating sees more people lose their jobs.

The RBNZ made these comments in a section of its biannual Financial Stability Report, released on Tuesday – a day ahead of it publishing the whole report.

It said around a quarter of the current stock of mortgage lending was originated during 2021 – when super-low interest rates enabled people to take out relatively large sums of debt to buy properties that have since fallen in value.

Of this lending done in 2021, around 20 per cent went to first-home buyers. The remaining 80 per cent went to other owner-occupiers, investors and businesses.

So, around 5 per cent of banks’ mortgage books can be attributed to borrowers who likely took out relatively large mortgages to buy their first homes at the peak of the market in 2021.

The RBNZ noted that while banks tested prospective borrowers to see if they could service debt if interest rates rose, mortgage rates have since risen above those test rates of around 6 per cent.

The RBNZ’s full Financial Stability Report will likely shed more light on borrowers feeling the pressure, including those who owe the bank more than what their property is worth.

In the segment of the report the RBNZ released, it said a factor that would lessen the degree of stress was that many mortgage holders didn’t take out as much debt as they technically could have when rates were super low, while meeting their banks’ serviceability tests.

Another mitigating factor is that people’s incomes have risen a lot – in dollar terms – over the past two years.

Nonetheless, the RBNZ noted the pain of interest rate hikes, aimed at dampening inflation, is yet to be felt by many.

The latest available data shows the average interest rate mortgage holders paid in February was 4.55 per cent – a couple of percentage points below the rates at which new mortgages were being sold at the time.

The RBNZ expected this average rate to rise to 6.1 per cent by the end of the year, as around 60 per cent of the stock of housing lending is either on a floating interest rate or on a fixed rate that reprices within 12 months.

“For a household with a mortgage, the share of disposable income required to service the interest component of their mortgage debt will more than double from its recent low of 9 per cent to around 22 per cent by the end of this year,” the RBNZ said.

“Despite the significant rise, this would still be lower than the peak experienced in mid-2008.

“However, this increased debt servicing burden is distributed highly unevenly, with some borrowers, such as those who fixed at the low of mortgage rates in mid-2021, seeing far greater rises in their debt servicing costs than others.”

The RBNZ concluded most borrowers would be able to continue to service their debt without significant stress.

In March, 0.3 per cent of banks’ mortgage books were deemed “non-performing”. This was only slightly above pre-Covid levels, when this percentage sat at 0.2 per cent. For a few months in 2020, the non-performing housing loans ratio rose to 0.4 per cent.