Falling rates encouraging more borrowing

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Since the beginning of the year, mortgage rates have fallen considerably as the Reserve Bank lowered its official cash rate from 6.5% to 5.25% and is expected to cut it a further half a percentage point to 4.75% later this month.

Monday, November 5th 2001, 2:47PM

by Jenny Ruth

David Cunningham, head of residential lending at WestpacTrust, says his bank’s floating rate of 8.5% nine months ago has now fallen to 7.2%.

That means for every $100,000 borrowed, the annual interest-only mortgage repayment has come down by $1,300 and the monthly repayment has dropped $108.33.

So are people borrowing more? Buying more expensive houses? Or are they taking advantage of the lower rates to repay the truckloads of debt New Zealand households took on in the last decade?

"As floating rates dropped, many of the bank’s customers have left payments the same," Cunningham says. But while some people are paying off their loans faster, others have topped up the amount borrowed.

He says the lower rates have supported the housing market at a time when one would otherwise have expected to see it come off the boil. Activity is noticeably up, but it isn’t dramatic, Cunningham says.

And more people are opting for floating rather than fixed-rate mortgages.

So are some people getting themselves over-extended with loans they won’t be able to afford when interest rates start rising again? Cunningham says that’s possible.

"Having said that, we’re probably never going to see 10% bank bill rates again. Because we’re more indebted, we probably can’t afford 10% mortgage rates again. We can’t afford rates we could have three or four years ago," he says.

"If the Reserve Bank needs to tighten monetary policy, the effect will be reasonably quick. Interest rates will be less volatile going forward because we can’t afford it."

In the mid-1990s, floating rates went from 6.5% to about 11.25%, Cunningham points out.

"That was a pretty violent move and must have knocked a few budgets out of the water. That essentially can’t happen again unless household incomes rise dramatically."

Tony Alexander, chief economist at Bank of New Zealand, says lower rates have obviously encouraged New Zealanders to borrow more.

Reserve Bank figures show mortgage borrowing show household debt grew 6.5% in the year ended September, up from just 5.8% in the year ended March. That was still slower than the 6.9% growth in the year ended September last year.

"Low interest rates traditionally stimulate borrowing rather than accelerated repayment," Alexander says. BNZ has also noticed more people opting for floating rates in recent weeks. Until then, the proportion of fixed rate lending had been steady at about 60% of borrowing.

ASB Bank has noticed a mix of people borrowing more or accelerating repayments.

"Most people are keeping their repayments the same. They’re either borrowing more because they have the capacity to borrow more or they’re shortening the terms of their loans," says ASB Bank’s Barbara Chapman. " What most people aren’t doing is reducing their repayments."

While the 11 September effect appears to have slowed both sales of existing homes and new housing consents, John Park, chief manager retail lending at National Bank, says it will be a few months yet before the banks notice any drop off in borrowing demand because sales agreed to before 11 September are still in the process of settling.

The recent school holidays probably had a bigger impact on housing activity. "That has a marked effect on the home loan market. It slows down," Park says. A good proportion of potential buyers and sellers have their minds on other things such as negotiating child care.

Park expects any post-11 September impact will be limited. " Events internationally aren’t really touching the back pockets of New Zealanders. We’re not seeing anything in our business to suggest a direct correlation," he says.

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