KEY POINTS:
Homeowners are being warned to brace for more mortgage misery with predictions of a rise in interest rates to 12 per cent by early next year - the highest since the housing boom began.
With floating rates now in double-digit territory and fixed rates not far behind, the mortgage market is set for a bumpy two years, as the Reserve Bank tries to take some of the steam out of the overheated property market.
With $40 billion of new mortgages written last year alone, the stakes are high - especially with a third of those fixed-rate mortgages up for renewal in the next 12 months.
Add in the fact that household debt rose 3.7 per cent during the March quarter, outpacing gains in household asset values, and it's not surprising that economists such as Gareth Morgan are forecasting tough times for homeowners.
Morgan believes the Reserve Bank will continue increasing the official cash rate until the heat is finally driven from the housing market - which will lead to fixed mortgage rates of around 12 per cent heading into the March quarter next year.
The next rise in the official cash rate is tipped to be in September.
The Reserve Bank's decision to raise the official cash rate to 8 per cent - the third hike this year and the 12th since Alan Bollard started his credit squeeze at the beginning of 2004 - has already led to higher debt servicing costs, especially for those who have just managed to get a toe-hold on the first rung of the housing ladder.
Morgan told the Herald on Sunday that he believed it wouldn't be long before fixed rates were on a par with floating rates. And it wasn't unreasonable, he said, to think that by March next year, mortgage rates could be as high as 12 per cent, as the Reserve Bank continued driving the heat from the housing market.
"Just looking at the lack of impact the current interest rate rises have had, adjustments will have to be closer to 12 per cent than they are to 10," he said. "For those who are leveraged or have bought recently, it'll be tough."
Massey University centre of banking studies director David Tripe agreed that mortgage rates could go "quite significantly higher" in the next few months.
If foreign investors were to lose confidence in the New Zealand economy, they would demand much higher interest rates, which in turn would put more pressure on homeowners, he said.
Currently, around 85 per cent of all mortgages are fixed, with one- and two-year terms accounting for more than half of that figure.
Homeowners on two- and three-year fixed-rate deals who were paying around 7.5 per cent are now looking at interest rates of more than 9 per cent, with floating rates already a percentage point higher than that.
Compare that with February 2002, when floating mortgage rates hit rock bottom at 6.62 per cent, and it's easy to see why the inflationary nightmare has forced some homeowners to the brink.
For a homeowner with a $300,000 mortgage, the difference between the current floating rate of 10.3 per cent and the 2002 rate is an extra $800 a month. Surprisingly, a rise in mortgage rates coupled with increasing house prices has not had a dramatic impact on the $13 billion-a-year housing market. The median house price in Auckland fell slightly from $452,000 in April to $450,000 in May, but growth continued in the rest of the country.
David Chaston of financial website www.interest.co.nz told the Herald on Sunday that, like Morgan, he expected mortgage rates to rise sharply in the next six to eight months.
But after that initial spike, he thought they may settle back to more normal levels.
"That has been the historical pattern," he said. "Things just don't keep going up or keep going down. At a certain level, normal supply and demand pressures will work to rebalance things, no matter how bad they may look from here."
However, Bank of New Zealand chief economist Tony Alexander was sceptical about an "imminent" fall in interest rates.
The trend around the world was for interest rates to rise, and chances were that fixed rates would go even higher in the short term.
"Our warning for 3 1/2 years has been that with so many insulating factors in the economy, the level at which interest rates would reach truly painful territory risked being a lot higher than people in general were thinking and the Reserve Bank was targeting," he said. "If I was looking to fix my rate in the very near future, I would look to lock it in now rather than take the rate on the day.
"I'd be looking at either a one- or two-year rate, knowing that whatever I do, I'm going to be paying well above where rates have averaged over the past few years."
ASB Bank chief economist Nick Tuffley predicted that homeowners would largely wear the costs of increased mortgage rates, although he did expect to see some rise in mortgagee sales. The impact of higher rates would show up in lower savings or reduced growth in retail spending, he said.
"In the slow parts of an economic cycle or the high-interest rate part of the cycle, there will always be more people coming under financial pressure than when rates are much lower.
"But it is important to remember that this economic slowdown has been mild (the economy is still growing at nearly 2 per cent - certainly nowhere near a recession) and the unemployment rate is a very low 3.7 per cent."
Liz Koh of financial advisers Moneymax was more optimistic. She doubted that mortgage rates would rise as high as 12 per cent, as there were clear signs that the over-energetic housing market was starting to cool at the top end - while for those looking to buy, home affordability was still a key issue.
She said that as far as she was concerned, the two main risk factors for interest rates and property prices were net migration and government subsidies for first-home buyers.
Increases in either of these two factors could drive up property prices and interest rates, if Alan Bollard continued to focus on house prices as a prime cause of inflation, she said.
But despite the squeeze in the housing market and high cost of money, there were still ways to keep repayments down, she said.
Mortgage brokers often were able to get a better deal than the ordinary homeowner, as they could use their "purchasing power" not only on interest rates but also on fees.
Mortgage brokers are now big players in the home lending market, with research showing a 40 per cent rise in the value of their lending business last year. Overall, they accounted for $15 billion, or 37.5 per cent, of the $40 billion of new mortgages written last year.
Megan Salt of the Mortgage Brokers Association said she wasn't surprised at the increase in their business.
Brokers knew the various products inside out, and while there never was a great deal of difference in published interest rates, there could be substantial variation in terms and conditions.
Rates could be deceptive, she said, given that a 0.25 per cent interest rate rise on a $100,000 mortgage was only $4.51 a week.
If you were paying too much in fees, then the quarter of a per cent less you were paying in interest would have little bearing on your long-term position, she said.
Sue Chetwin of the Consumers' Institute said the key to securing the best deal possible on your mortgage was to shop around.
With cut-throat competition in the home-loan market, some banks were prepared to offer reductions on their published rates, while others often threw in freebies to entice peopleto defect.
"If you can shop around and get a better rate and go back to your bank and get them to reduce the rate, then you are doing well," she said.
So which bank is best?
Chetwin said that while on the face of it, you'd expect it was the bank that offered the best interest rate, there were other factors to take into account - such as how you structured your lending against your repayments and the associated fees a bank charged up front and during the course of the loan. It was also important to factor in the normal bank products you used, such as your credit card and savings account, and how they could work for you in paying off your mortgage.
Chaston agreed. Instead of a standard one-size-fits-all home loan, homeowners could decide on a fixed or variable rate, could choose how often they made their repayments and in some cases could use the interest on savings to offset home loan interest.
And his advice if you are not getting the best deal from your bank: look elsewhere.
In a rising interest-rate market, he said, banks did not usually charge a penalty for breaking a fixed rate, so the chances of being hit in the pocket were slim.
Tripe said it was important to remember that the advertised rates were not necessarily the only rates.
"There is certainly more room to negotiate on a floating-rate loan than on a fixed rate, but that isn't to say there isn't room to negotiate on a fixed-rate loan either," he said.
"In fact, quite a lot of loans are done at significantly less than the advertised price."
Some people would be hit really hard when their mortgages rolled over, so they needed to look long and hard at the variety of options out there.
Koh said for those really struggling to meet their mortgage commitments, most lenders offered repayment holidays of up to 90 days, which was usually enough to let homeowners build up their reserves or pay off other short-term debt. Another option was to convert your mortgage to one on which only the interest was payable. That would have the effect of reducing the amount of your repayments because you were not paying back principal. Yet another option was to extend the term of your mortgage, say from 20 years to 25 years, which would also have the effect of lowering your repayments.
Fixed rate pays off
For years Emma White and Andrew McDowall dreamed of owning a little piece of real estate they could call home. They saved hard, did without, and two years ago were finally able to unlock the door to home ownership. The modest weatherboard duplex in the Auckland suburb of Sandringham was less than what their parents had, but it was a start.
But this peace of mind came at a price - $600 a week for the next 30 years.
With everything riding on the deal, Emma and Andrews' instincts were to shield themselves from rising interest rates by securing a long-term fixed mortgage rate of around 7.5 per cent, rather than taking a punt on the volatile money markets.
The gamble paid off. For the next two years they have insulated themselves from mortgage rates of 9 per cent plus.
"Thankfully, we don't have to worry about the mortgage or the new rates for some time yet. We are so pleased, now, we went for the longer term when we signed up," Andrew said.
Over the next two years, they'll be watching the markets closely - and hope that when it is finally time to renegotiate their mortgage, the rates will have fallen back to around 7.5 per cent.
But they know it's a lottery.
"We'll just wait and see. There's no guarantees what will happen."
For those forced to pay higher mortgage rates, some mortgage brokers recommend they split their mortgages into three portions - one fixed for a short period, another fixed for a slightly longer period and the third portion in some sort of revolving credit-type account, which means their debt is reduced each time their wages or salary are paid into it.
