As Kiwis steel themselves for recession and rising interest rates, one major bank reports more than two-thirds of its mortgage customers are ahead on their repayments – despite record inflation and the cost-of-living crisis.
Others anticipate the pressure will come on as more people roll off fixed home loans and on to higher interest rates.
On Wednesday, the Reserve Bank lifted the official cash rate to 4.25 per cent - the highest since 2008 - and forecast a recession from mid-2023. Reserve Bank Governor Adrian Orr advised Kiwis to “think harder about saving rather than spending”.
Corelogic predicted the new rate track would push fixed mortgage rates towards 7 per cent or higher in the coming months - with 20 per cent of home loans in New Zealand fixed but due to reprice in the next six months.
Banks were offering cash-back incentives of up to $25,000 on some new home loans, however, experts advised people to figure out the “trade-offs” first.
Consumer NZ says mortgage repayments are New Zealanders’ top financial concern and in the past three months, 51 per cent have changed their spending habits and cut down on expenses amid high living costs. Annual inflation hit 7.2 per cent in the September quarter, with the annual food price index up 10.1 per cent in October.
Banks told NZME small increases in repayments could help borrowers save money in the long term.
An ANZ spokeswoman said more than a third of customers were ahead on their home loan by six months or more and savings levels were holding.
She said while people were having to make tougher spending choices, the “vast majority of customers are in a sound financial position”.
Many, however, would roll on to higher rates over the coming year as their current fixed term ends, which may add to the financial pressure.
She said ANZ had two cashback offers on new home loans. First-home buyers could be eligible for a minimum cash contribution of $3000, or homeowners who take out a new loan of $100,000 or more could get 1 per cent back, up to a maximum $20,000.
Westpac NZ acting general manager of consumer banking and wealth, Jo McGregor, said 68 per cent of its home loan customers were ahead on mortgage repayments as of September.
“Even a small increase in repayments can knock years off your loan term.”
Kiwibank senior product manager Richard McLay said more than 40 per cent of Kiwibank home loan customers were paying above their minimum payment amount.
When considering whether to pay down a mortgage, customers needed to think about their possible future requirements for those funds.
He said prior to interest rates starting to increase in mid-2021, customers were often refixing to a lower interest rate and opting to keep their repayments the same.
“The rate of interest customers will be paying on their home loan is probably around 6 per cent, and likely higher than the returns on deposits or investments, so it may make financial sense to pay down lending if there are any funds to spare. For customers who are currently fixed at a low interest rate, increasing payments now would reduce the loan balance before paying a higher rate of interest in the future.”
A BNZ spokesperson said 43 per cent of its total home loan book was ahead of scheduled repayments, with most on a 30-year term.
“It’s important that customers make financial decisions that are right for them based on their own personal circumstances.”
BNZ had a 1 per cent cashback on new classic or standard home loans of $300,000 or more, up to a maximum of $25,000.
Bank offers were subject to conditions, and all the banks offered borrowers options for topping up their repayments.
Last month New Zealand Bankers’ Association chief executive Roger Beaumont said nearly 46 per cent of people with a home loan were ahead on their repayments.
From January to June 2022, customers took out 44,681 new home loans, with more than half issued to first-home buyers.
Craigs Investment Partners investment director Mark Lister said it was always better to pay off the mortgage as fast as possible. He said low interest rates had made it easier to “ramp up your payments and knock a hole in it”.
‘‘Hopefully, some people have taken advantage of the low interest rates by making lump sum payments or increasing their payments in recent years.”
It was good to hear some people were ahead on their mortgage payments but he expected those numbers could fall in the future due to the current economic climate.
“You probably want to have a little money put aside in case there are unexpected medical bills and car repairs that you didn’t see coming … you might even lose your job or have to change jobs.”
Te Ara Ahunga Ora Retirement Commission personal finance lead Tom Hartman said borrowers only making minimum repayments on any debts left all the “power” with the lender.
The most popular tool on its Sorted money advice website was the mortgage calculator and he said restructuring, increasing or making regular or lump sum payments could save borrowers tens of thousands of dollars in interest.
“It’s quite incredible.” More often than not, however, people got stuck in the rhythm.
‘’We’re creatures of routine and tend to repeat the same things over and over again. Because mortgages are stretched over decades, sometimes it feels like it really isn’t going to make a difference but the opposite is true. Little tweaks here and there make an outsized difference over time.’'
In his view, it was not in the lender’s best interest to say “hey, did you know that you could finish your mortgage?”
“They’re most interested in setting up regular repayments and ties … over the longest term possible. It’s not surprising or even morally wrong, it is just the way it is.”
Consumer senior communications and campaigns adviser Jessica Walker said its sentiment tracker data showed mortgage repayments were New Zealanders’ top financial concern.
‘‘Over the past three months, 51 per cent of New Zealanders have changed their spending habits due to financial reasons, with the primary change being cutting down on expenses.’'
She said 91 per cent of mortgage holders had not changed provider in the last year, indicating a “high degree of bank stickiness”. About 50 per cent chose to seek advice from a mortgage adviser.
Walker advised against being tempted by home loan incentives without figuring out the trade-offs.
‘‘Loyalty reward points probably don’t make much sense if it means you pay a higher interest rate. We recommend consumers try and negotiate – don’t assume you have to pay the advertised rate – you can ask a bank to match other offers and try and haggle on interest rates and fees. The worst they can say is no.’
“If you take out the shortest mortgage term you can afford, you could stand to pay much less interest overall.”
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