ANZ's major move takes effect this week! Fears of further interest rate rises spur buyers to act faster

Recent ongoing increases in mortgage rates have caused widespread anxiety among home buyers. They face the worry that their pre-approved loan amounts could be reduced at any time, alongside a harsh reality: having to fix their mortgages at higher rates. Buyers who have just secured a property at auction also hope to bring settlement forward, while others are negotiating shorter settlement periods during the buying process. They fear rates will keep rising and want to lock in a lower rate as soon as possible.

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Banks differ in how long they allow customers to lock in a rate. ASB allows a rate to be locked in within 35 days after a purchase agreement becomes unconditional. BNZ, Westpac and ANZ offer a maximum validity period of 60 days, while Kiwibank offers 45 days, with an additional 30 days available for a fee.

 

Many buyers are speeding up their purchases

 

Ray White sales agent Dan Lavender recently helped a buyer bring settlement forward to lock in a lower mortgage rate before it rose from 5% to 6%. He said that, in this particular case, earlier settlement suited both parties, as the seller also wanted to settle earlier on their new property.

 

Easy Street mortgage adviser Gareth Veale said he also had clients this week who wanted to lock in lower rates and requested settlement within 60 days, rather than the 90-day period proposed in the sale and purchase agreement. However, Veale said a settlement period of less than 60 days would not suit every transaction. For example, tenants living in a property would need 90 days' notice.

 

Another financial adviser, Gene Andrews, said whether to settle earlier depended on the circumstances of both parties. It could be a good option if it benefited everyone. Buyers without bridging finance would often choose a longer settlement period to give themselves enough time to sell their property.

 

The mortgage test rate will rise this week to 8.6%

 

Alongside rising interest rates, buyers, particularly first-home buyers, are trying to secure a property they like before their mortgage pre-approval expires. This is because mortgage advisers often tell them that banks will lend them less under the new mortgage test rates.

 

But, as the saying goes, plans cannot keep pace with change. Just as many buyers were speeding up their purchases, ANZ delivered some unwelcome news.

 

From this week, ANZ is raising its mortgage test rate to 8.6%, a new high. Other commercial banks are widely expected to follow ANZ's lead soon. An ANZ spokesperson said the review of its mortgage test rate was intended to ensure it responsibly reflected the current interest rate environment. The bank would continue to honour all existing pre-approvals and pre-approval applications completed before the test rate increase at 9h in the morning on 12 December.

 

Financial experts warn that the move is likely to push more buyers out of the property market.

 

Gareth Veale said a higher mortgage test rate would further affect first-home buyers' ability to afford a home and the amount they could borrow. He said plainly that it would only make mortgages harder to obtain for people who did not already own a home. Taking this year's October national median house price of NZ$825,000 as an example, a buyer with a 20% deposit could have borrowed NZ$660,000 from a bank last year. Under the new test rate, however, their borrowing capacity would fall sharply to NZ$480,000. This means they could no longer buy a NZ$825,000 home, with NZ$645,000 now their maximum purchase price.

 

Meanwhile, another increase in mortgage test rates also means that buyers who purchased between August 2020 and November 2021, when test rates were at their lowest, will be forced to refinance at rates beyond their ability to afford.

 

The far-reaching effects of higher mortgage test rates on homeowners

 

Squirrel founder John Bolton said first-home buyers were the group most affected by higher mortgage test rates. As test rates rose, banks would reduce the proportion they were willing to lend, leaving first-home borrowers able to borrow around 20% to 25% less than last year. This would force them to consider only cheaper properties.

 

Of course, first-home buyers are not the only ones affected. Rising interest rates are hurting everyone in the property market. When homeowners refix their mortgages, they will find their repayments are about 35% higher than before. Bolton said this would eat substantially into households' disposable income and seriously affect their finances.

 

Infometrics chief economist Brad Olsen was more concerned about homeowners fixing their mortgages at higher rates, as some could be forced to pay tens of thousands of dollars more in mortgage repayments.

 

He said the speed of interest rate rises was extraordinary. Just over a year ago, the one-year fixed mortgage rate was still 2.2%, whereas the test rate was now well above 8%. To cope with enormous repayment pressure, borrowers would have to rethink their spending habits, potentially rent out some rooms in their homes, or ultimately seek help from their banks.