Cost of living: Mortgage arrears climbing as interest rate pressure builds

Mortgage arrears rose sharply in January to a near three-year high as households continue to be squeezed by rising costs and interest rates, data from credit bureau Centrix shows.

The number of households behind on mortgage repayments in January was up 22 per cent year-on-year to approximately 18,400 - the highest since April 2020.

And it looks likely to get worse before it gets better as more homeowners roll off fixed home loans and on to higher interest rates.

“Looking at the latest data, it appears mortgage arrears have increased alongside rising interest rates due to the Reserve Bank’s official cash rate [OCR] decisions,” Centrix managing director Keith McLaughlin told the Herald.

“Regardless of who you ask, the general consensus is the OCR will continue to climb into at least mid-April, resulting in further interest rate hikes and potentially further climbs in mortgage arrears.”

As of December 2022, the average rate (fixed and floating) being paid by mortgage holders was only 4.35 per cent, according to Reserve Bank figures.

This remains on par with the average home loan rate being paid in August 2019 but is up significantly on the 2.83 per cent average in September 2021.

However, all major banks are currently offering one-year fixed home loan rates north of 6.50 per cent.

The Reserve Bank last week maintained its forecast of the official cash rate peaking at 5.5 per cent after delivering its 10th consecutive increase rate - 50 basis points to 4.75 per cent - as it continues its fight against inflation.

And recent data further points to the struggle households will likely face this year.

The central bank last week released projections that it expects the average household with a mortgage to spend 22 per cent of their disposable income on interest payments by the end of the year.

Mortgage holders already paid a record amount of interest in the last three months of 2022, with $3.5 billion forked out to banks - 53 per cent higher than just over a year earlier, when interest costs were the lowest on record.

Furthermore, a Westpac analysis yesterday headed “Weathering the Storm” calculated that many Aucklanders could be paying $900 per fortnight more than they were at the lower rates.

“Alongside mortgages rolling onto higher interest rates, the overarching tightness of the current climate is squeezing Kiwi households and their budgets,” McLaughlin said. “This is particularly evident with the cost of things like groceries and rent.”

McLaughlin pointed to Stats NZ figures that revealed the cost of living for the average household increased by 8.2 per cent in the 12 months to December 2022.

New mortgage lending fell 24 per cent in January compared with the year prior, Centrix figures showed.

New lending exposure for the month came to $3.32 billion, down from $4.78b in December 2022, and $4.38b in January 2022.

More than 18,000 households were behind in mortgage payments in January. Photo / Getty Images

Meanwhile, new mortgage applications are down 25.6 per cent year-on-year in February, but rose slightly (+3 per cent) compared with January.

Arrears also climbed among unsecured personal loans, credit cards and buy now pay later accounts.

Consumer arrears rose to 11.9 per cent of the active credit population in January. There were approximately 430,000 Kiwis behind on their repayments, up 20,000 from December 2022.

“While the arrears cycle tends to peak post-Christmas, the current arrears level is 6 per cent higher compared to the same time last year,” McLaughlin said. “Although the increasing arrears rates are concerning and something to keep a close eye on, it is important to point out that we are still below pre-pandemic levels.”

Unsecured personal loan arrears jumped to 9.2 per cent, the highest percentage on record since 2017.

Credit card arrears climbed to 5 per cent of active accounts, the highest level recorded since January 2021. Buy now pay later arrears also rose to 9.3 per cent.

Vehicle arrears were up to 5.5 per cent in January – up 4.9 per cent year-on-year.

McLaughlin said mortgage and vehicle arrears in particular were a key indicator of consumer confidence as they are usually the last things to slip for households feeling the financial pinch.

With cost pressures rising, unsurprisingly demand for credit was higher.

Demand for credit cards climbed 21.7 per cent year-on-year and buy now pay later rose 4 per cent.

Non-mortgage lending for January came to $414 million, down from the seasonal surge pre-Christmas - $591m in November and $569m in December - but was 3 per cent higher when compared with January 2022.

McLaughlin said it was important for anyone struggling with their finances and meeting their repayments to speak with their creditors as soon as possible.

“In this current climate, many will understand the realities facing Kiwi households, so we recommend contacting your lender to explain the situation and come to an agreement for a repayment plan,” he said.

“It’s better to manage these challenges proactively than to let your repayments - and therefore financial health - slip.”