New homeowners who bought property during the Covid-fuelled housing boom could now be under mortgage stress as around a third of their incomes goes into servicing rapidly rising interest rates.
That’s the finding from financial research platform Canstar’s latest research.
Canstar’s analysis found based on the average household total income for a household that is making mortgage payments ($151,450), those who purchased a property in April 2021 will now be paying an estimated 31 per cent of their income into their mortgage.
Mortgage stress is generally defined as spending more than 30 per cent of household income on a mortgage.
The numbers are based on the average New Zealand house value of $845,491 on March 31, 2021, with a 20 per cent deposit, giving a loan amount of $676,393 taken out over a 25-year term.
Two years ago the monthly borrowing cost was $3055 based on the average two-year fixed term rate of 2.56 per cent which was just under a quarter of the average household income.
Now the rates have risen to an average of 6.5 per cent for a two-year fixed term, which would increase the monthly repayments to $4451 or 31 per cent of the average household income.
However, the impact on an individual borrower will vary significantly based on the loan amount.
Canstar New Zealand general manager Jose George said the analysis showed how difficult rising mortgages could be to manage, particularly as other costs soar.
“We’ve seen a perfect storm of financial pain for those who purchased houses two years ago, when property prices were at their peak and interest rates were at a record low.
“Since then, the costs of servicing mortgages has increased dramatically, as have day-to-day expenses such as groceries,” he said.
“It’s an incredibly difficult time for all New Zealanders, but even more so for those who purchased homes during these boom times.”
Interest rates have risen quickly since the Reserve Bank (RBNZ) started lifting the official cash rate from a record low during the pandemic as it fights 30-year high inflation.
The RBNZ’s Financial Stability Report earlier this month said around a quarter of banks’ mortgage books originate from 2021, of which around 20 per cent went to first-home buyers.
Therefore 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 added that while most borrowers would still be able to continue to service their debt in a high-interest-rate environment without significant stress, the increased debt servicing burden was distributed highly unevenly.
“… some borrowers, such as those who fixed at the low of mortgage rates in mid-2021, [are] seeing far greater rises in their debt servicing costs than others,” it said.
And the message from some of the country’s banks over the past couple of weeks following their half-year results is that mortgage holders appear to be coping so far.
Antonia Watson, chief executive of ANZ NZ – the country’s largest bank – said households were coping “surprisingly well” with the higher interest rates.
Watson said when interest rates came down during Covid many customers took the opportunity to pay down debt.
Westpac NZ’s chief executive Catherine McGrath said: “While we are not currently seeing significant numbers of customers requiring hardship assistance, demand is slowly increasing, and we expect it to rise further as the outlook worsens.”
“Many customers are adjusting to repayment increases and we’re ready to help those who need time to transition,” McGrath said.
According to credit bureau Centrix, mortgage arrears climbed for the eighth consecutive month in March, with 1.31 per cent of residential mortgages reported as past due – a 26 per cent increase year-on-year.
However, mortgage arrears still remain below pre-Covid levels when they were 1.35 per cent in December 2019.
Meanwhile, non-performing housing loans for March 2023 - bank loans that are subject to late repayment or are unlikely to be repaid by the borrower - came to $1.085 billion, however, that is just 0.3 per cent of banks’ non-performing loans, according to RBNZ figures.
The average rate (fixed and floating) being paid on mortgage lending in March was 4.70 per cent, according to the RBNZ.
But this remains well below what many will pay when their mortgages come up for refixing, which today, not accounting for special rates, could be somewhere between 6.50-7 per cent.
This compares with the 2.83 per cent being paid on average by mortgage holders in September 2021.
Canstar’s George said talking to your bank and figuring out if there are ways to navigate this difficult period could help those who are struggling.
“For example, extending the term of the loan could be an option, as could switching to an interest-only loan for a period, or taking a mortgage holiday.
“It is important to front-foot financial stress, and find ways to manage the extra outgoings.”
Loan Market mortgage adviser Bruce Patten said while mortgage stress wasn’t a massive problem at the moment, a lot of loans were coming due in the coming months.
“I expect it to worsen leading into the second part of this year,” he said.
“There are quite a few people requesting interest only at the moment trying to make ends meet and hoping rates will drop.
“Also some people that have paid more than they needed when rates dropped are now pushing their term back out to reduce payments.”
Patten said he didn’t expect the OCR to drop until early 2024.
“I think the pressure will come on to see the banks drop rates quickly this time. Especially if inflation has started to fall quickly.”
“Then I would expect them to be around the mid-four to mid-five mark depending on how big a recession they [RBNZ] push us into.”