Bite coming on in housing repayments

Mortgage banker James Lockie has noticed an increase in mortgagee sales. Picture / Chris Skelton

With an estimated $40 billion worth of fixed interest rate mortgages up for renewal this year, lenders are bracing themselves for increasing numbers of people defaulting on their mortgages in the coming months.

Real estate agents, usually among the first to hear about mortgages gone wrong, are already seeing it. Carey Smith, chief executive of Ray White, says there has been a 22 per cent increase in the number of mortgagee property sales over the last quarter.

Non-bank lenders, who often lend to people main street banks will not deal with, are also in the front line. General Finance subsidiary Cairns Lockie Mortgage Bankers says there has been a big increase in what it calls its "dishonour roll" - people failing to make their monthly mortgage payments.

"Over the past three months, the number of missed payments has doubled," says director James Lockie. The mortgages ranged from $300 a month to $4000 a month.

Lenders say that as interest rates go from just over 6 per cent to 8 per cent, it will prove too difficult for some households to keep up with their commitments. The non-bank industry expects October and November to be crunch time for many.

A person with a $200,000 mortgage on a 6 per cent loan, renegotiated at the market rate of 8 per cent, will have to pay $110 more a fortnight. And this is on top of increased fuel costs, higher property rates, credit card bills and inflation of 4 per cent.

"People will really feel the pinch of an extra $110 a fortnight," says Dave Shatford, general manager of distribution at NZ Mortgage Finance and Approved Mortgage Brokers.

He says some New Zealanders simply cannot sustain a mortgage. "We sometimes say to people, 'there's no point in continuing to go backwards'. But it's in the New Zealander's psyche, they don't want to rent."

Lockie agrees. "Some of the people to whom we are talking should not be owning property." He tells customers consolidating their debt to cut up their credit cards.

"They cut up their store cards and come back with another $10,000 or $20,000 of debt a year later.

"We turned down some loans the other day, the people were spending the equity in their house and... racking up consumer debt."

To people who are about to miss a mortgage payment, Lockie advises talking to their own bank before talking to refinancers. "Only when they get to the end of the road or don't feel they are getting a fair hearing should they come to us," he says. "People's own banks have more invested in them and more to lose."

While NZ Mortgage Finance, which owns 75 per cent of Mike Pero, has not had many people in trouble yet, Shatford says it is anticipating activity in the next few months.

"All the signs are there. Our feeling is that we are going to see a lot more," he says.

Where some people are getting into trouble is when they have had a couple of good years earning, and planned their lives as if this is going to continue, says John Grant, director of New Zealand business at Wizard Home Loans. "They then set up future commitments based on the last couple of years and when the continuity is not there it starts to impact." Some Wizard customers have bought additional properties in the boom times. "They have got into buying a series of rental properties and have become highly geared."

When the economy turns a bit and they have a property which goes untenanted for a longer period of time than usual, they find they have not built this into their finances, says Grant.

The inability to keep up with mortgage payments happens across all socio-economic groups. Around half of Wizard's business comes from refinancing, the other half from new loans. Wizard's solution for people in mortgage trouble is to consolidate all their debt so that they are paying an overall lower interest.

Real estate agents say a mortgage gone wrong does not necessarily get as far as a mortgagee sale.

Ray White's Smith says often the homeowner will find a last-ditch solution through family help. Out of 80 mortgagee sales currently on the books only 22 have actually gone under the hammer - the rest have been rescued by refinancing or family intervention, he says.

"Housing is generally the last thing that banks want to foreclose on given the equity rise in properties in most areas," he says.

A high number of mortgagee properties are withdrawn before auction. Even up to the morning of the auction, the owners find a way to solve their problem, says Graham Smith, manager of Barfoot & Thompson City.

"A lot of people do find it easier to postpone the evil day by [going to] a non-bank lender," he says.

Registered valuers Seagar and Partners say they have noticed a few more properties in the sought-after suburbs of Auckland getting into trouble. Principal Chris Seagar says often the owners have been trying to sell at a price they feel they have to, but the market thinks is too high.

"If they'd been more willing sellers they may have sold without having to go to mortgagee sale," he says.

Meanwhile the lucrative property market of Taupo is seeing some casualties.

Alison Whittle, a sales agent with Bayleys Realty in the town, says she has noticed more mortgage sales and is about to handle some in the $700,000 to $900,000 range.

"We went for a long time without seeing any," she says.

The big difference between the current housing finance situation and earlier bad times in the cycle is that job confidence is strong. With tight unemployment rates people can almost be assured of being able to earn a wage no matter what happens. And this is why they are happily getting themselves into more debt.

On the other hand, people who own their own businesses cannot be as optimistic.

BNZ chief economist Tony Alexander describes a scenario playing out in some New Zealand households. A small business owner, his margins being squeezed, finds his profitability has taken a hit.

"He's realised he's got to ditch this large house in order to save the company."

Peter Hunter runs a small manufacturing business in West Auckland. But the past year has not been easy, and Hunter is not relaxing as he comes out of a rough patch. Rising commercial rents have hit his business hard.

"We had a huge rent increase of 33 per cent, that's made a difference and of course there are rates on top of that."

Hunter is also under pressure to keep giving his staff generous wage rises every year and, as a good employer, wants to do this. At the same time he has other costs to worry about, thanks to world markets.

"There's been a large increase in material costs because of the rising prices of metals. Copper has doubled in the last six months," he says.

"If you own a small business, you don't necessarily have a fixed income. We are closely linked to the building industry. If there is a downturn in that, it has a serious effect on our turnover. We still have wages to pay."

Hunter and his wife, who works part time, are lucky they have good equity in their house and are not solely relying on the business for their finances.

Despite the worrying financial situation for some businesses, small business specialist Sarah Trotman says she would still encourage people to mortgage their houses to set up their businesses, rather than give up equity to outside partners. She did this herself and does not regret it.

Another tip she has for small-business owners is to first talk to their suppliers if things are tough and see if they can be flexible about payments, rather than going to the bank. But if they do need to talk to the bank: "I think the banks should be more patient with business owners when they are having trouble meeting their mortgage payments, as long as the owners have a clear plan of where their business is going.

"One of the things that business owners need to do is have the confidence in negotiating with suppliers when starting up," she adds.

When Trotman first hung out her shingle, she went to Auckland website design business Jericho and asked if they would design her company website, although she couldn't afford to pay for it immediately. They agreed to her paying when she could afford to and she's now a loyal customer.