Warning bells on mortgages

Retirement Commissioner Diana Crossan has warned homeowners to beware of taking out mortgages that may soon be unaffordable because of rising interest rates.

She said fixed-rate mortgages - now used by 80 per cent of New Zealanders with mortgages - provided no protection when the term ended.

Her warning, issued to coincide with the launch of a new mortgage calculator on the commission's website, reinforces a strong statements from Reserve Bank Governor Alan Bollard and Finance Minister Michael Cullen about the dangers of rising household debt.

Dr Bollard has raised the official cash rate eight times since the start of last year, from 5 to 7 per cent.

Average floating mortgage rates have risen in the same period from 7.2 to 9.1 per cent.

Two-year fixed rates, which move in anticipation of future floating rates, have risen from a low point of 6.2 per cent in mid-2003 to an average of 7.7 per cent last month. They now range from 7.95 per cent at Kiwibank to 8.3 per cent at the ANZ Bank.

Ms Crossan said it was tempting for people on a fixed-term mortgage to ignore the highest interest rate in seven years until it hit them hard a year or two down the track.

"Say someone fixed three years ago on 6.99 per cent," she said. "Unless they plan ahead, they could get a very rude awakening in two years when they have to re-fix at, say, 8.5 per cent.

"On a $250,000 mortgage, they could be facing an extra $300-plus a month if interest rates continue to rise. Everyone who has a mortgage, fixed or floating, needs to do the figures and ensure they are budgeting now to cover the increase in payments. That's where our new mortgage calculators come in."

The calculator shows how few first-home buyers are now likely to be able to afford the median price of houses sold in Auckland in September - $379,000.

To cover interest on such a house at a five-year fixed rate of 7.7 per cent from Kiwibank or the Bank of New Zealand, buyers would have to stump up a 20 per cent deposit of $75,800, borrow the remaining $303,200 and repay more than $2000 a month.

If they repay $2200 a month, they could pay off the mortgage in 28 years and two months. By the end of it, the calculator shows that in today's dollars, allowing for inflation of 2 per cent a year, they would have paid $357,282 in interest and $211,240 in effective principal repayments - rather less than what they actually borrowed because inflation would reduce the real value of the debt.

But if the interest rate rose to 8.5 per cent, they would have to either increase your payments by a further $165 a month or else keep paying at $2200 a month for just over 44 years.

Retirement Commission spokeswoman Robyn Cormack said the scary calculator was part of the commission's role of educating Kiwis about financial issues.

"We know that, for many, retirement is a long way off, yet it's what you do today that has the biggest impact on your wellbeing tomorrow."

"A lot of young people don't want to think much past the weekend. For the rest of us who are taking on financial commitments it's all about dealing with debt or making tradeoffs throughout your life which determine your wellbeing.

"What we are saying is: be aware of the full costs of debt and the way changes of interest rates can affect the amount of money going out of your purse every week or month."

Mortgage Brokers Association chairman Geoff Bawden said Aucklanders taking out new mortgages today were signing up for repayments averaging $1800 to $2200 a month.

"The reality is that a lot of homeowners are two-income," he said. "But brokers and lenders do have a responsibility to provide prudent and careful advice."

How much do you owe? Check link below to check your mortgage repayments at Sorted online.