Mortgage rates rise: Thousands of first-time buyers could find themselves in trouble if interest payments rise
Rupert Gough, founder of Mortgage Lab, talks about tougher lending laws. Video / NZ Herald
There are fears that rising mortgage rates will leave thousands of first-time homebuyers in financial trouble as the Reserve Bank tries to fight inflation.
Many will pay thousands each month to service their mortgages.
The bank’s own research, released to the Herald under the Official Information Act, estimates that up to half (49 percent) of people who bought their first home during last year’s market high experience “maintenance stress.” could if interest rates reach 6 percent.
This would hit the tens of thousands of buyers who borrowed at historically low interest rates and are now having to reset their mortgages at much higher rates.
First-time homebuyers borrowed $17.88 billion through 32,493 separate loans last year. That borrowing was nearly $8 billion more than in 2017, when first-time homebuyers borrowed $10 billion across 23,702 loans.
A Reserve Bank paper last September warned these people about “maintenance stress.” That doesn’t mean the borrower will default on their payments, but instead measures the number of people who would have to “drastically reduce their cost of living” to keep their mortgage under control.
Banks typically check that borrowers can still service their mortgages at an interest rate of at least 6 percent before offering them a loan.
At some banks, interest rates are already at 6 percent. ANZ reacted to last week’s official cash rate decision by raising lending rates; its standard 2-year fixed rate is now 5.85. Kiwibank and Westpac both offer 2-year fixed rates of over 5 percent.
Mortgage broker Bruce Patten warned rates could “definitely” hit 6 percent.
“I would hope they won’t do it,” he said.
Infometrics economist Brad Olsen said he expects interest rates to settle just below 6 percent for two years.
“If the Reserve Bank hikes more aggressively, as we expect, we could avoid a 6 percent two-year fixed rate,” Olsen said.
Last week, the bank raised OCR by 50 basis points to 1.50 – the largest single jump in 22 years. Markets are expecting another 50 basis point hike in May, but that wouldn’t necessarily feed through to mortgage rates, which have already priced in the hike.
“If we see a two-year fixed rate of 6 percent, I would expect it to be around late 2022 to early 2023,” Olsen said.
He noted that two-year fixed rates had already risen faster than the cash rate, implying banks had already priced in the changes.
“The faster increase in the two-year rate means that larger increases in OCR don’t necessarily drive the two-year rate up one-to-one,” Olsen said.
A March survey of economists by financial website Bloomberg suggested interest rates would hit 5.5 percent.
One person struggling with higher mortgage rates is Patten’s son Liam, who bought his first home in the Pakuranga Heights last year.
Liam said he was “a bit worried” about the rising cost of borrowing when his fixed term ends next year.
He estimates his annual borrowing costs could increase by another $25,000 once he completes his tenure.
Liam has turned his garage into an extra room and living space that he lives in so he can rent out the house.
Concerned that rising interest rates and an uncertain economy could complicate things, he has set aside money to deal with rising costs, but he’s not sure those savings will be enough.
“If I save $100 a week for a year, that’s $5,200 — so [$25,000] is a huge amount more,” Liam said.
The government says interest rates are still at near historic lows – lower than when they took office.
But the amount of money first-time homebuyers are borrowing to get on the market has increased. According to Reserve Bank data, the average first-home mortgage in 2017 was $434,782. Last year it was $547,800.
This would result in a big difference in repayments. A first-time homebuyer in Auckland might have borrowed $750,000 at an interest rate of 2.6 percent last year. If mortgage rates hit 6 percent, that mortgage would cost over $1,500 more each month — about $4,500 a month total.
Bruce Patten said that wherever interest lands there will be pain.
“There will be people who sell and have to sell.”
He added that some previous first-time homebuyers who had to sell “also made a 30 percent capital gain during that time.”
“They might make some money, but they need to downsize.”
Patten said banks may have questions to answer if mortgage rates climb to 6 percent.
“I think they’re going too far right now,” Patten said, noting that banks could adjust their margins on some interest rates to ease the pain.
National housing spokesman Chris Bishop said early homebuyers would feel the impact of inflation on their mortgages.
“They have had to buy into a housing market where prices have skyrocketed under Labor and are now facing significant rate hikes as the Reserve Bank tries to bring inflation under control.”