The toughest time for mortgage holders is approaching. Are you ready?

As mortgage rates fell to record lows between 2020 and 2021, thousands of home buyers entered the property market, while commercial banks provided the home loans borrowers needed.

 

Lending activity reached its peak during this period. In 2021, ANZ Group chief executive Shayne Elliott said ANZ had provided a record number of home loans to New Zealanders. Reserve Bank of New Zealand data shows that new mortgage approvals rose each month during the period of low mortgage rates, with lending peaking at NZ$10,487,000,000 in March 2021.

 

Data from the Real Estate Institute of New Zealand (REINZ) shows that the national median house price peaked at NZ$925,000 in November 2021, with a median time to sell of 29 days after listing. Today, 18 months later, the property market looks very different. According to the latest REINZ data, the national median house price has fallen by NZ$150,000 (-16%) to NZ$775,000. The median time to sell has lengthened to 45 days. Reserve Bank of New Zealand data shows that the value of new loan applications increased by just NZ$3,836,000,000 in February this year, well below the peak two years earlier.

 

In stark contrast to falling house prices, inflation surged over the past 18 months to its highest level since 1990, reaching a staggering 7.3%. Although the latest Stats NZ data shows CPI inflation fell to 6.7% last quarter, it remains well above the Reserve Bank's target range of 1% to 3%. The direct result has been an increase of 500 basis points in New Zealand's Official Cash Rate (OCR) over the past two years, taking it to 5.25%. Against this backdrop, mortgage rates have also climbed. The average two-year fixed rate offered by commercial banks has risen sharply from 2.524% in June 2021 to 6.497% today.

 

The reality is not as bad as feared

Fortunately, the major commercial banks have so far avoided widespread failures by mortgage holders to meet their monthly repayments. As of last week, 37 properties nationwide were being sold through mortgagee sales, far fewer than during the global financial crisis in 2009, when the nationwide total was 3024.

 

So how are borrowers coping with sharply higher mortgage rates? The reality appears less dire than might be imagined.

 

 

ANZ How bank customers are faring

 

An ANZ spokesperson said about 35% of the bank's customers still have mortgage rates below 4%. She said that although many customers moving onto higher fixed rates over the coming year may face pressure on their personal finances, data shows 33% of ANZ borrowers have a repayment buffer of at least 6 months. This means the vast majority of its customers are in good financial shape. People have maintained good saving habits, which has considerably eased their repayment pressure.

 

The spokesperson also said that even if borrowers' finances deteriorate, debt restructuring could help, including “extending their mortgage term or moving part of the loan to interest-only repayments”. (Borrowers should note that extending the mortgage term or paying interest without repaying principal will result in more interest being paid.)

 

Westpac How bank customers are faring

 

Westpac New Zealand general manager Mike Norfolk said in a statement that, as of 31 March, 67.7% of home loan customers were ahead on their mortgage repayments, slightly down from 68.4% a year earlier. These customers were an average of 10.8 months ahead of the bank's scheduled repayment timetable. He said the bank's home loan team had not seen an increase in requests to extend mortgage terms or switch to interest-only repayments.

 

 

Kiwibank How customers are faring

 

Kiwibank general manager of home lending Nicole Pervan said that from 2012 to 2020/21, customers maintained their monthly repayments even as interest rates fell, with some increasing payments to shorten their loan terms. Kiwibank data shows that just over half of its borrowers, representing 170,000 accounts, were ahead on their mortgage repayments. Pervan said that even though many customers had moved from record-low rates to higher rates over the past year, this had done nothing to diminish most customers' willingness to repay early.

 

However, the bank expects fewer customers to remain ahead on repayments as more mortgages reset from low to high interest rates. She explained that a substantial proportion of Kiwibank customers had actively paid down their loans in the low-interest-rate environment, reducing 25-year mortgage terms to 20 or even 17 years. Now, with rising rates increasing repayment pressure, about 1% of customers temporarily opt for interest-only repayments to ease financial strain. She also stressed that most households currently appear able to cope with the new repayments required by higher mortgage rates, although this is very challenging for many borrowers.

 

Pervan said that despite its optimism about the market, Kiwibank had seen an increase in customers experiencing hardship following changes in their personal circumstances. These could include job loss, serious illness or divorce. The number of such cases has quadrupled, from a very low level before the pandemic. The bank's team is therefore closely monitoring the finances of customers whose interest rates are about to change, as well as those already experiencing hardship or falling behind on repayments.

 

How The Co-operative Bank's customers are faring

 

The Co-operative Bank chief executive Mark Wilkshire said nearly 1/3 of its customers pay more than their minimum required repayments. He had not seen an increase in borrowers requesting interest-only repayments, and these customers account for less than 5% of all borrowers. He said the benefit of using higher test rates was that, even when the OCR was at its low of 0.25%, banks could still stress-test applicants at rates of 6% or higher. Wilkshire said that, based on the latest information available to the bank, more than 80% of customers would face increases of 1% to 25% in their minimum mortgage repayments over the next 6 months. The Co-operative Bank's priority is to help customers adjust to higher interest rates.

 

 

BNZ How bank customers are faring

 

A BNZ spokesperson said the bank had not seen any material change in customers' repayment behaviour. The effect of extra repayments on a mortgage term depends on each customer's circumstances, including loan size, term, interest rate, loan structure, and the size and frequency of additional payments. Customers who can afford it can significantly reduce the interest paid over the loan term through either small regular extra repayments or a lump-sum payment. The spokesperson said the bank had seen a slight increase in customers requesting a temporary switch to interest-only repayments following Cyclone Gabrielle and the Auckland floods.

 

ASB How bank customers are faring

 

An ASB spokeswoman likewise said the bank had not seen an overall increase in customers switching to interest-only repayments. However, she acknowledged that many New Zealand borrowers would be experiencing the effects of rising interest rates for the first time. ASB is proactively contacting customers it believes may be financially vulnerable to help them choose the most suitable response. In February this year, the Reserve Bank of New Zealand predicted that, by year-end, mortgage holders could be paying an average of about 22% of their disposable income towards their rising mortgage interest costs.