Fixed-rate mortgages about to sting

House owners can expect a tough new year. Picture / Derek Flynn

The Reserve Bank's six interest rate hikes this year have barely nibbled at the incomes of people paying mortgages, but it is confident they will take a bigger bite next year.

Even though it has raised the official cash rate by 150 basis points from 5 per cent to 6.5 per cent over the past year, the effective mortgage rate - the average rate households pay on their mortgage debt - has risen only 45 basis points.

While OCR increases tend to flow through quickly to floating mortgage rates, about 70 per cent of mortgage debt is on fixed rates, mainly for one and two-year terms.

Those interest rates are influenced not only by expectations of where short-term New Zealand interest rates are going but by international bond yields as well, and international yields, though rising, are still much lower than New Zealand's.

This gives the banks no shortage of foreign money with which to fund fixed-rate mortgages.

On top of that, they are engaged in a price war, especially for two-year loans, fierce enough to wipe out their margins.

All this has largely insulated new borrowers from the Reserve Bank's OCR increases and has seen about $500 million of mortgage debt a month move from floating to fixed rates. It is counting on this state of affairs not lasting.

It says that even if banks' margins only return to break-even levels (about 60 basis points) and global interest rates rise less than the consensus among forecasters expects, the effective mortgage rates paid by households would rise another 40 basis points by March next year and another 15 points the year after.

Under that scenario, the lowest mortgage rates available would be between 7.5 per cent and 8 per cent by the end of next year.