How will first-home owners cope with mortgage repayments rising by more than NZ$1000 a month?

Recent mortgage market overview

A recent New Zealand Herald headline suggested that first-home buyers who bought at last year's median house price, with a 20% deposit, may have reason to worry. As mortgage rates continue to rise, their monthly repayments could increase by more than a thousand New Zealand dollars when they refix.
Research by Canstar found that borrowers were paying an average interest rate of 3.3% at the end of 2021, but the average one-year fixed rate has now jumped to 4.63%. For someone buying at New Zealand's median house price of NZ$1,027,121, with a mortgage of NZ$822,000 based on a 20% deposit, monthly repayments would leap from NZ$3599 to NZ$4628. If they refixed for two years at the average rate of 5.29%, their monthly repayments would rise to NZ$4943.

Mortgage broker Karen Tatterson said, “Some borrowers have been shocked by the scale of the interest rate rises, and there are very few discounts available on the rates offered by the major banks. The last time this happened was five or six years ago. Things are much harder now, particularly for people who first entered the market when rates were low. They have never seen rates this high, and they have never previously been unable to negotiate a discount.”

In the latest round of rate rises, Kiwibank fired the opening shot on 30 May, followed closely by ANZ and Westpac. ASB also raised its fixed mortgage rates last Thursday. BNZ is the laggard in this round: it has yet to announce changes, but they may come soon. New mortgage applications are already at unusually low levels. For the major banks, the current market is more a battle to defend their market share than a fight to gain a larger share.
The good news for the market is that many banks are turning their attention to cashback incentives in this environment. Kiwibank recently increased its cashback offer for loans above NZ$300,000 to 1%, up from the previous 0.7%. It also raised its maximum cashback payment to NZ$10,000, although strict eligibility criteria remain. Even so, Kiwibank's new cashback initiative is expected to put pressure on competitors to match it, while the major banks look for other ways to grow profits.

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Recent first-home grant application trends

Housing agency Kāinga Ora recently said it approved 1149 first-home grant applications in the first quarter of this year, down 60% from the 2966 approved in the first three months of 2021. Under the scheme, an individual can apply for up to NZ$5000 towards an existing home or NZ$10000 towards a new home, provided they have contributed to KiwiSaver for at least three years and their income is within the prescribed cap. Approvals have steadily declined since July 2021, falling by about 1000 applications every three months.
Last month, the Government raised the property price caps under the First Home Grant scheme to reflect changes in the booming housing market. First-home buyers can now buy a new or existing property in Auckland for less than NZ$875,000 and qualify for a grant.
First Home Grant property price caps before and after the changes

“The latest First Home Grant eligibility criteria:

1. Be aged 18 or over, with pre-tax income over the past 12 months below the prescribed income cap;
2. For an individual buyer without children, maximum annual income over the past 12 months must be no more than $95,000; for an individual buyer with at least 1 child, maximum annual income over the past 12 months must be no more than $150,000; for two or more buyers, usually a couple, maximum annual income over the past 12 months must be no more than $150,000.
3. Not currently own any property, except an ownership interest in Māori land;
4. Have contributed at least the required minimum amount to KiwiSaver, a complying fund or an exempt employer scheme for at least three years;
5. Buy a property within the price cap for its area and live in it for at least 6 months;
6. Have a deposit of at least 5%. Sources for the 5% deposit can include a withdrawal from your own KiwiSaver account, Home Start Grant funds, bank savings or a cash gift from family, but cannot include a loan or guarantee from a family member, among other requirements.

The eligibility changes mean that First Home Grant property price caps have been revised and First Home Loan price caps have been removed, giving prospective first-home buyers more housing choices. Kāinga Ora home ownership products manager Jason Lovell told media that factors outside the Government's control, such as house prices, interest rates and lending requirements, could affect the number of people applying for and receiving a First Home Grant.
Commenting on the changes, Mortgage Lab chief executive Rupert Gough said the latest figures showed just how “out of touch” the previous “terrible” price caps had been. In many parts of the country, finding a home for NZ$400,000 was impossible. The caps are now more geographically specific, and the Government should have adjusted them long ago.
Infometrics chief economist Brad Olsen believes home ownership remains far out of reach for some New Zealanders, with government help making very little difference and rising interest rates also putting pressure on first-home buyers. The numbers make it very, very difficult. Yes, [house prices] have fallen, but not by much.
With first-home buyers facing such a difficult lending environment, YIJU once again spoke to Jiayuan Mortgages, a team of experienced mortgage advisers that includes several people with many years in banking, for an in-depth market analysis.

Q: In your experience, will most first-home buyers really face monthly interest increases of more than NZ$1000, as the news reports suggest? Is there any way to reduce this expense?

The Jiayuan Mortgages team: Interest rates keep rising, and many clients' fixed-rate terms are about to expire. When clients face higher interest payments, an experienced mortgage adviser can help. We generally advise clients along the following lines:
1. Choose and adjust an appropriate fixed-rate term based on your circumstances. 2. If your mortgage is split into portions or held with different banks, consider fixing for different terms to balance the risk of rising rates. 3. If you have cash coming in, use financial products offered by different banks to reduce interest costs, such as Total Money or Flexible Home Loan.

Q: With a cashback battle between banks about to erupt, what should borrowers watch out for when seeking fixed mortgage rates and cashback?

The Jiayuan Mortgages team: When clients choose a bank's interest rate and cashback offer, much depends on their mortgage adviser's negotiating ability with the bank. We design different loan structures around each client's circumstances, then approach different banks to seek the best possible cashback payment and interest rate. In particular, when a client is considering switching banks, we check the terms of their previous loan to maximise the benefits without incurring early repayment charges.

Q: Many people shop around for the best rate but ultimately stay with the same bank. They may feel switching banks is too much trouble or face challenges under tighter lending rules. Some worry they may not be approved again under the current CCCFA requirements. What advice do you have for these first-home buyers?

The Jiayuan Mortgages team: This is another area where our professional mortgage advisers can help. Our experienced advisers generally develop several lending options around a client's circumstances, then choose the safest and most affordable after thorough discussion with the client. For example, a client with a healthy income may be able to service their existing mortgage or may need to increase their borrowing. Alternatively, if they have been with their current bank long enough to refinance, they could consider refinancing to receive another cashback payment to help manage rising interest costs.