In the grip of mortgage madness

Young Aucklanders are signing up for mortgages of up to $1 million, sparking fears an entire generation could be heading for a cash crisis.

With the median price for a house in Auckland now at $372,000 - a rise of 16 per cent in the past year - many young couples are being saddled with massive loans they can barely afford, say experts.

Given many are either unable or unwilling to save for their retirement as well, they could be headed for a miserable old age.

Jeff Matthews, senior adviser for Spicers Portfolio Management, said he knew of two Auckland couples with mortgages of over $900,000 - one of which was over a single property. Although their income was substantial, they were paying "absolutely horrendous" amounts of interest.

"It's like we've lost touch with the reality of what can go wrong."

Mr Matthews said a reality check was needed by encouraging people to save money from an early age, to have larger deposits, and to take on smaller mortgages.

"All it would take is for someone to lose their job, get sick, have another baby and suddenly they have a problem."

Mortgage brokers say million-dollar loans are becoming less rare as the Auckland property market continues to defy predictions it has hit its peak.

In February and March, 322 homes in the Auckland area sold for more than $900,000 - up from 246 in the same period last year.

Real Estate Institute president Howard Morley said the top end of the Auckland housing market was vibrant, with young professional couples among the main buyers.

Even apartments and townhouses, and houses without a view in places such as Devonport, were now hitting the million-dollar mark.

Auckland University economics lecturer Susan St John is concerned that too many buyers are not looking far enough into the future.

"There will be a great bulge in the numbers of older people and how we are going to deal with that doesn't bear thinking about right now when we look at the size of these mortgages," she said.

Dr St John warns couples relying on downsizing their house, and using the capital gain as their superannuation, to be careful.

"When the babyboomers hit old age we will have a bulk of people offloading these expensive, large and hard to maintain properties on to the market."

Retirement Commissioner Diana Crossan said it was important for people taking out home loans to understand their full cost. A $372,000 loan, repaid at $3,000 a month with an interest rate of 8.5 per cent, will cost more than $700,000 over 25 years - almost half of which will be interest.

However, paying off the mortgage should still be their main priority, said Massey University banking expert David Tripe.

"While I certainly wouldn't want to be repaying a mortgage into my 50s, the focus for these people should be making paying off that mortgage the priority while they are earning."

But Mr Matthews doubts some will. "It's easy getting into debt. It can be that much harder getting out of it." 

- HERALD ON SUNDAY