Households with a mortgage have more than three times their disposable income in debt. Photo/Michael Craig.
With mortgage rates at record lows, there has never been a better time for Kiwis to be paying off their debts more quickly.
But experts say there is little sign of that happening.
Latest Reserve Bank figures show New Zealand's mortgage debt grew by 6.3 per cent in the year to May, climbing to $265.7 billion.
The growth is lower than it has been - in 2016 mortgage debt rose by about 9 per cent and in 2004, before the global financial crisis, growth was as high as 17 per cent.
But in the past five years alone, mortgage debt has risen by 38 per cent from $191.9b and that debt is highly concentrated.
Around two-thirds of households have no mortgage debt, leaving roughly 516,000 households to shoulder the debt burden. That means the average mortgage is about $514,000.
Households with a mortgage have on average more than three times their disposable income in debt, compared with about 1.5 times for households without a mortgage, according to the central bank.
Those who have borrowed in recent years are even more heavily leveraged, and the Reserve Bank says that 40 per cent of recent borrowers have debt of more than five times their disposable income.
The Reserve Bank says although the growth in household debt and house prices has slowed, in the past year household debt has still grown more quickly than income and it has warned that the risk could increase.
"Housing market pressures could re-emerge if there is a strong response to the recent decline in mortgage rates, or reduced uncertainty about the future tax treatment of property investments.
"Given this environment, the financial system's vulnerability to risks in the household sector remains elevated, and must continue to be closely monitored and managed."
Ayesha Scott, a finance lecturer at AUT University, says the debt load households are bearing is historically high. Research points to some Auckland households borrowing as much as nine times their income to buy a house.
"This is high and it is high globally."
Historically, she says, borrowing was around three times a household's income.
"Our mortgages are high and repayments are a lot higher against our income."
Previous generations had a much lower level of their take-home going to pay off the mortgage, she says, and were able to make extra payments to get rid of the debt sooner.
"What it means is, we don't have a buffer to be paying a whole heap in extra repayments in the same way past generations had."
That has implications for other aspects of people's lives - like retirement. In the past, people might have paid off the mortgage in their 50s, and could then save that money towards their retirement.
But 30-year mortgages, which aren't taken out until borrowers are in their early 30s, are stretching the payback period into people's 60s.
Scott says the problem with having very little buffer is that if a person lost their job or interest rates went up, it could have a significant impact on the household.
Last time New Zealand was in recession after the global financial crisis, mortgagee sales also spiked. In 2009 more than 2600 houses went to forced sales.
New Zealand is a long way off that point and mortgagee sales are at a low - just 84 were recorded in the first six months of this year - down on 102 recorded in the first six months of last year, according to CoreLogic data.
Kelvin Davidson, senior economist at CoreLogic, says the level of household debt as a ratio to disposable income is as high as it has ever been at 164 per cent and most of that is property debt.
He says it can only be that high because interest rates remain low, which creates a real risk for New Zealand.
"There is a vulnerability there.
"We are far more vulnerable to an interest rate rise than ever before."
Although it doesn't look as though the official cash rate is going to head higher any time soon - in fact, economists are picking more cuts this year - and mortgage rates have continued to tumble this year, that won't last forever.
Reserve Bank proposals to increase the amount of capital held by the banks have prompted warnings from those banks that mortgage rates could rise.
In its submission on the proposals, Westpac said the move could add $6000 a year to the cost of an average Auckland mortgage.
The Reserve Bank has said any increase is likely to be minimal - a rise of 0.20 to 0.40 percentage points.
Davidson says any rise will put pressure on those households that are already highly leveraged.
While interest rates are low, people should be keeping their repayments the same and paying more off their mortgage, he says.
"And some people are doing that."
But others were using low rates as a windfall to buy a car or go on holiday.
"If you are doing that it will add to the vulnerability when rates do rise."
Bruce Patten, a mortgage broker with Loan Market, says people are still putting a car and holidays on the house; he recently helped one client put a Mustang "on the house".
"I don't know if I would say if it was as prevalent [as a few years ago].
"When they have the money they are doing it."
But he says the big difference compared with a few years ago is that it is now much harder to get bank funding for anything - let alone toys.
That resulted from the banks tightening their lending criteria to meet loan-to-value ratio restrictions, which have been in force since 2013.
"People's capacity to borrow is less because the banks are being tougher."
Although mortgage rates have fallen below 4 per cent, banks are still stress-testing borrowers to make sure they can pay back the money at higher interest rates - about 8 per cent or so.
Patten also says low rates mean this is a good time to reduce debt, but few are taking the opportunity to pay back more than they have to.
"To be honest, as a percentage it is really, really low."
Patten says some people left the amount they pay the same when they re-fix at a lower interest rate, but found other uses for the money.
"It is human nature. They will find another purpose for it. They will buy another car."
He estimates that more than 80 per cent of borrowers are less likely to pay down debt more quickly than they are required to.
"It's not wrong. They are still paying down debt."
Patten says higher mortgages mean people are staying put in one property for longer.
"When things were flying, houses were going up by 100k a year, people were moving on more.
"Now people are staying in their property for longer. That's not a bad thing."
He says the longer a person stays in a property, the better their equity position is. "It's kind of a forced saving."
The good news is that consumer debt isn't growing as quickly as it has in the past, but the bad news is that borrowers are still struggling to pay down their debt.
In the past year consumer debt grew by 1.7 per cent to $16.75b, in line with inflation. If population growth is factored in, it is essentially flat, says Satish Ranchhod, senior economist at Westpac.
Ranchhod says a slowdown in the housing market was behind the lower growth in consumer debt.
"The housing market has softened and that has put the brakes on."
But Ranchhod says because the official cash rate is expected to be cut further and a proposed capital gains tax is off the table, he expects property prices to pick up and that to result in more consumer borrowing.
"As the housing market picks up we expect to see the New Zealand spending appetite pick up."
He doesn't see high consumer debt as a problem for the economy as low unemployment means it is serviceable for now.
But he says it is prudent for households to consider whether that debt would continue to be serviceable.
Reserve Bank data shows the amount of money and percentage of disposable income spent on debt servicing has been pretty stable for the past year, Ranchhod says.
"High levels of debt can raise some concerns for the economy but right now New Zealand is in a reasonably good state.
"It is something we should keep an eye on but it's not the dark clouds that some are making it out to be."
But Ayesha Scott, a finance lecturer at AUT, says the problem with consumer debt is that interest rates are much higher than mortgage debt and it tends to be used to purchase items which depreciate in value.
Mortgage debt, in contrast, can be used to invest in something that goes up in value and student loan debt can help get an education, which could result in a better job and more money.
"This type of debt is almost overwhelmingly used to purchase items which immediately lose value."
Finance on a new car is a good example, where the minute the buyer drives the vehicle away, it is worth less.
Scott says although there are smart ways to use a credit card and other interest-free loans, in many cases people don't use credit well.
She points to credit card debt, which sits at $7.26b. Interest is paid on around a third of that debt as many people don't pay off their balance in full.
Interest rates on credit cards are as high as 21 per cent. Those rates don't tend to go down when the official cash rate falls as they are more linked to the risk of lending money on unsecured assets.
Consumer debt also includes short-term loans from banks as well as finance companies and payday lenders, where interest rates can be more than 500 per cent a year.
Scott says the system is set up in a way that means consumers tend to bear all the risk and responsibility for poor decision making.
"I think of the 18-year-old kid that buys a flash car and signs up for a credit card. There is so much responsibility for a poor decision that can really mess things up for you."
Lenders have had an obligation to ensure borrowers can afford to take on debt since a law change in 2015, but budgeting advocates say that hasn't fixed the problems for those who get trapped in a cycle of debt.
The government is in the process of amending credit law to cap loans to ensure people don't pay more than 100 per cent of the principal amount for high interest loans - those charging more than 50 per cent.
READ MORE IN THE SERIES:
• Yesterday: How much Kiwis owe and why it matters
• Monday: Farm debt
• Tuesday: Global debt
OPINION: Why a capital Gains Tax is still so contentious - and who supports it.