Nearly half of New Zealand’s mortgage debt is due to be refixed between October 2022 and September 2023, and some borrowers are likely to see big hikes in their repayments. Carmen Hall speaks to anxious homeowners having to drastically cut their living expenses to meet soaring interest rates.
Amanda Wallace knows how to live on a budget.
But that skill is being pushed to the limit as her Bay of Plenty family battles higher interest rates and a new home build which cost $50,000 more than expected due to material price increases and supply chain woes.
The Rotorua mother-of-two said the cost of living and paying the mortgage was “expensive and very stressful”.
Monthly payments for the first-home buyers, on one income, had climbed from $1500 a month to about $2000.
Loans on their $500,000 mortgage were spilt, including a floating rate of about 8 per cent, which was a far cry from the 2.49 per cent they managed to lock in when they bought their land.
“It’s not just a case of finding the money, because you can’t just pull it out of thin air. Budgeting is key; my husband and I work out our budget and try to stick to it as much as we can.”
She tried to slash their grocery bill to less than $150 a week, but said it was impossible despite eating the same foods, so other things have had to go, including dining out and savings.
She is one of a growing number of nervous homeowners trying to find ways to trim costs as interest rates soar. The country’s largest bank has already started contacting some homeowners who “show signs of needing reassurance and support” as interest rates rise.
Nearly half of Kiwis’ mortgage debt is due to be refixed between October 2022 and September 2023, according to the Reserve Bank, and with interest rates rising, some homeowners with high debt levels could see their weekly mortgage payments rise by more than $400.
Saphire Pohatu, of Tauranga, had her 2.49 per cent interest rate end earlier this month. She refixed for three years on 6.49 per cent, which was ‘a big shock’.
Her repayments had gone up by $159 a fortnight, and while she acknowledged her situation was not as dire as others, she had to make lifestyle changes.
“It’s quite scary. I am lucky because we have two incomes and two adult children living with us, so there is a little bit of support there.”
“We are thinking about how we are going to manage it going forward, and we are cutting back on certain things, including Sky TV. We are also cutting back on food, and I’m telling the kids [they] can only have one egg a day because they are out-the-gate expensive.”
“There are a few things that need [to be] done maintenance-wise, but that is not going to happen.”
Pohatu said she had been a homeowner for 20 years and had not experienced such high-interest rates.
“It’s really hard... I have never seen inflation like this in my lifetime.”
Zachary Brown, who works for Bay of Plenty Times and Rotorua Daily Post publisher NZME as a media specialist, said rising interest rates were making him “anxious”.
He bought his first home with his fiancée in October 2021 and fixed the mortgage at 4.95 per cent for two years. Brown said they paid $698,500 for the three-bedroom doer-upper in Gate Pā, Tauranga, and the mortgage repayments were about $1200 a fortnight.
According to his calculation, that could climb to $2000 - an extra $800 every two weeks - when the term expires later this year.
Brown anticipated “tough times” ahead, and he was grateful they had a flatmate. In his view, the pain would be much worse for those who had overcommitted financially and stretched themselves to buy more expensive properties.
“I think there will be mortgagee sales, as there will be a lot of people in negative equity and it’s going to be hard for them.”
Mortgage Lab financial adviser Keith Munro said the cost of borrowing had increased and all refixes would be at significantly higher interest rates than the rates the clients had been on.
“While some have considered the impact on their living expenses and lifestyle, for others, this is something they are only beginning to consider.”
As interest rates continue to climb, people needed to consider if they should they fix for one year and take advantage of the lower rate in the short-term, or pay more to lock in today’s rates for a longer period.
Those with a large single mortgage account should consider splitting it up into a number of smaller accounts with different terms, he said.
Banks were offering 3.5 per cent for one year at the beginning of 2022, and were now typically offering around 6.5 per cent.
For homeowners who had been paying principal and 3 per cent interest over 30 years on a $400,000 loan that decided to fix for two years, weekly payments would jump from $390 to around $596 per week.
A $700,000 loan would jump from $681 to about $1,042 per week.
Munro said inflation was forecasted to remain around 7 per cent going into 2023, and household budgets would be stretched without the impact of higher mortgage payments.
“Add mortgage payments and, for those who borrowed to the maximum to get into their home, this means cutting down on the luxuries to the point of being frugal to get by.
“People who were in danger of defaulting on their mortgage should talk to their bank before it is too late. They are best to show they are budgeting and working to avoid a default.”
However, despite interest rates going up, property ownership might still be more affordable for some.
“For those who wanted to buy in recent years but weren’t able to, 2023 may offer them hope.”
Kyle Imeson, from Summit Mortgages, said the impact of rising interest rates meant people would simply have less money to spend, which would have a big impact on people’s day-to-day lives.
“Cut back on some luxuries if you can. Also, any short-term debt should be cleared asap. Credit card debt etc. will not be your friend, so start with that. Maybe have a look around at anything you may be able to sell to clear debt, and if you are going to sell anything big, do it sooner [rather] than later.”
For example, if a mortgage was $1 million, the repayments would go from about $1,100 to about $1,550 a week, or an increase of about $460 a week, he said.
“Essentially, people are spending all, sometimes more, of an entire pay cheque on mortgage repayments. That’s a lot of money, and you aren’t getting any extra house for it - it’s just money out of your pocket, so it’s tricky for a lot of households.”
Overall, people seem to be coping reasonably well and will get through it okay, he said.
“But I don’t think many people will be buying spa pools and Harleys this year.”
NZHL Home Loans Insurance business owner Sally Copeland said household budgets would be impacted as borrowers come off lower-interest fixed-term loans, which would cause stress amongst homeowners.
“While you can’t control the rates, you can tailor a home loan structure that best fits your situation and makes the most of your money to reduce your interest costs over the life of your loan. It’s crucial to get advice tailored to their specific situation, as changes to a loan may extend the home loan term and, in turn, the long-term total interest costs.”
Majesty Mortgage and Insurance Advisors mortgage adviser Brooke McGougan said homeowners feeling the pressure of rising rates should complete a budget to see where they could cut expenditure.
“We are closer to the end of the interest-tightening cycle as opposed to the beginning. All a crystal-ball gaze, but I believe rates are starting to peak, and perhaps we can look to see rates starting to decrease late this year.”
An ANZ spokeswoman said the vast majority of customers were in a sound financial position, and many took the opportunity to pay down debt while interest rates were low.
About a third of its customers were ahead by six months or more.
However, many of its customers would roll off fixed home loans onto higher rates over the coming year.
“When that happens, some will be under financial pressure. People shouldn’t be nervous about talking to their bank.
“We’re keen to talk with customers sooner rather than later if there are any signs of problems to see if, for example, we can structure their finances differently to relieve some pressure.”
ANZ had also bolstered the bank’s Customer Financial Wellbeing team and were “proactively contacting customers who show signs of needing reassurance and support”, she said.
A BNZ spokesman said the majority of its customers were in good shape.
“But interest rate increases and the rising cost of living will mean more New Zealanders are going to find it tough. The sooner they get in touch, the more options we’ll have to find a way forward together.”
“By refocusing their spending, good budgeting and staying on top of their finances, we are confident the vast majority will adjust to the new interest rate levels.”
A Kiwibank spokesman said slightly more than two-thirds of customers with fixed loans have at least one portion due to refix this year.
It was proactively monitoring affordability, and customers were making wise choices, especially when it came to discretionary spending.
To date, Kiwibank had seen no significant uplifts in home lending defaults within normal seasonal levels, he said.
Bay Financial Mentors manager Shirley McCombe said this year it was likely to see people it had never worked with before.
Less than five per cent of its clients were homeowners, but it was available to give budgeting help, and “there is no cost, no income limit, and no judgment”.
It employs about 5000-plus staff in its stores, trade and distribution centres.