Banks classed $1.2 billion of mortgage debt as “non-performing” in May. Photo / 123RF
Banks classed $1.2 billion of mortgage debt as “non-performing” in May. Photo / 123RF
The number of borrowers struggling to meet their mortgage repayment obligations is continuing to rise, as the impact of high interest rates and a slowing economy bite.
Banks classed $1.2 billion of mortgage debt as “non-performing” in May. This was 12 per cent more than in April and 51 percent more than in May last year, according to new Reserve Bank data.
While $1.2b was the highest value of non-performing housing loans since at least 2018 (when the data series began), and suggests a few thousand borrowers were likely under financial pressure, the figure only made up 0.4 per cent of banks’ mortgage books.
Other than for a few months in 2020, the last time New Zealand had a 0.4 per cent non-performing housing loan ratio was in June 2015.
This ratio got as high as 1.2 per cent around the time of the 2009 Global Financial Crisis, and stayed as low as 0.2 per cent from mid-2016 until the onset of Covid.
Non-performing loans include loans and advances that are 90 days past due, as well as “impaired loans”. These are loans that the lender believes it will not receive all future repayments on due to the borrower entering financial difficulty, failing to make repayments, restructuring their contractual agreement with the lender, or breaching covenants or other contractual terms and conditions, for example.
Of the $1.2b of non-performing loans in May, the vast bulk ($1.1b) were 90 days past due, but not impaired.
Loan Market mortgage adviser Bruce Patten expected the value of non-performing loans to keep rising, as more borrowers refix their loans on to higher interest rates.
Patten believed owner-occupiers under financial pressure were doing what they could to hold on to their homes – working with their banks to defer repayments or temporarily only paying the interest on their loans, not interest and principal.
He noted homeowners weren’t keen to sell at a time the market was flat.
“They’ll exhaust every resource to hang on. But you can only do it for so long,” Patten said.
He believed that while many borrowers could cope with high interest rates (on top of high living costs) for a short time, doing so for more than two years might be a push and prompt some to try to sell.
He suspected more owner-occupiers would need to reassess their situations next year.
Nonetheless, Reserve Bank data showed only 8.2 per cent of mortgage debt taken out by owner-occupiers was interest-only in May – the lowest portion since at least 2016 when the series began.
Patten said responsible lending rules imposed on banks discouraged them from keeping borrowers on interest-only contracts for extended periods of time.
While 32.9 per cent of mortgage debt held by investors was interest-only in May, this was well down from the 42 per cent level it hovered at in 2017.
High interest rates are starting to bite homeowners. Photo / 123RF
Patten believed that if interest rates remained high and Labour was re-elected to govern at the October election, more investors would exit the market.
The Government in early 2021 started preventing residential property investors from writing off mortgage interest as an expense when paying tax (new builds are excluded).
The rule will be fully phased in by 2025, by which time investors are expected to pay more than a half a billion dollars more in tax over the year.
The Government also extended the bright-line test from five to 10 years.
National is campaigning on removing the interest limitation rule and bringing the bright-line test back to two years, but hasn’t specified when it would do so.
It would need to be wary of not reigniting the housing market to the extent this prompted the Reserve Bank to keep interest rates higher for longer in its efforts to stamp out inflation.
The Reserve Bank in May suggested it wouldn’t increase the Official Cash Rate (OCR) any more in this tightening cycle and would start cutting the rate mid-next year.
However some bank economists, worried about the impact of high net migration and government spending, believed the Reserve Bank would need to lift the OCR one more time later this year.
ANZ economists projected two-year special mortgage rates peaking at 6.6 per cent in the September quarter, before falling to 6.1 per cent in the March 2024 quarter, and 5.5 per cent in the September 2024 quarter.
They noted someone with a $500,000 30-year mortgage would face repayments of $655 a week on a 5.5 per cent interest rate, compared with $757 on a 7 per cent interest rate.
Jenée Tibshraeny is the Herald’s Wellington Business Editor, based in the parliamentary press gallery. She specialises in government and Reserve Bank policymaking, economics and banking.
