Editorial: Choppy waters ahead for home-loan borrowers

The cost of home loan debt is set to soar. Photo / 123RF

EDITORIAL:

The sharp rise in home loan interest rates over the past few months is a sign of the pressure set to come for borrowers.

In early April, home-owners could lock in a one-year fixed term for under 4 per cent, but that is now a distant memory as most of the major banks advertise rates around 5.35 per cent.

Only the smaller and Chinese-owned banks are offering rates below 5 per cent.

Those looking to fix for two years will also be struggling to find a sub-5 per cent rate while longer-term five-year fixed rates are nudging close to 7 per cent.

It's a far cry from the record lows borrowers enjoyed just 18 months ago. Back in January 2021, borrowers could lock in 2.29 per cent for a year.

CoreLogic data shows the special one-year rates have jumped 2.2 percentage points from their trough and two-year rates are up 2.6 percentage points from their bottom point.

Yet the effective mortgage rate on existing loans is still low at only 3.1 per cent and has only risen 0.4 percentage points.

Around half of all mortgage debt is due to come up for re-fixing in the next year. A further 12 per cent is on floating rates. That shows a lot of the pain of rising interest rates has yet to come to bear.

Next month, the Reserve Bank is due to review the official cash rate again and economists are picking another 50 basis point hike, which would take the OCR to 2.5 per cent.

Based on its May update, the trajectory of the OCR is to continue rising to 3.9 per cent by mid-2023 although some say it won't need to go that far to cool the rampant inflation.

But, even if only 150 basis points of the potential 200 basis points rise are passed on by the banks, mortgage rates are likely to creep up to around 7 per cent.

While that is around the long-term average for New Zealand's mortgage rates, it's been a long time since borrowers have found themselves paying that much, and for more recent borrowers it will be a completely new experience.

Banks say borrowers can cope and have been tested at much higher rates than those they have been on in recent years and many borrowers have kept their payments the same.

But it will be first-home buyers and others who stretched to the maximum to get on the property ladder and take the next step up who are likely to feel the pinch the most.

Last week, economics consultancy Infometrics revealed research showing it is the worst time for first-home buyers to buy a house in 65 years.

While falling house prices will be good news for first home-buyers, the debt burden is only set to get more expensive.

Mortgagee sales are at record low levels - just six were recorded across New Zealand in the March quarter.

The key to keeping them low will be ensuring New Zealanders stay employed.