Expected rising interest rates to put more pressure on mortgage holders

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Interest rate rises are adding $900 a month extra to mortgage repayments for homeowners across the country with an 80% mortgage on a home bought two years ago and $1,600 a month for Aucklanders where house prices are higher.

Tuesday, July 11th 2023, 10:45AM 1 Comment

by Sally Lindsay

The bank’s latest update on housing finances says this is likely to worsen over the next year as it expects the average mortgage rate to rise by a further 150 bps.

“Over the coming year about 50% of all mortgages will come up for repricing and will expose increasing numbers of borrowers to higher rates,” Satish Ranchhod, a Westpac senior economist says. 

The RBNZ estimates households with mortgages could see the share of their incomes spent on interest costs rising to more than 20% by the end of this year.

This comes at a time as wealth levels fell by $42 billion in the first three months of the year and have fallen 9% since the end of 2021. The decline is mainly due to the 17% fall in house prices since interest rates started rising in late 2021.

Many households are yet to feel the mortgage pain. Ranchhod says with 90% of New Zealand mortgages fixed for a period, the pass through of rate hikes has been gradual.

In fact, accounting for the extent of mortgage rate fixing, the bank estimates the average mortgage rate has only risen by around 120 bps to date. As a comparison, the OCR has risen by 525bps since late 2021.

The report says this is of concern to families who entered the housing market in the past couple of years. Over the past year, increasing numbers of borrowers have rolled off the low fixed mortgage rates that were on offer in the early stages of the pandemic, and on to much higher interest rates. “For instance, borrowers who fixed their mortgage for two years in May 2021 might have secured a rate of about 2.6% but when they go to refix now, they’ll be looking at a rate of more than 6%,” he says.

Against that backdrop, households spending on debt servicing is pushing higher. Data recently released by Stats NZ shows, on average, households are now spending 7.5% of their disposable income on interest payments each quarter. That’s up from a low of 5% at the end of 2021.

“That’s still relatively low compared to before  the pandemic when interest costs accounted for around 10% of household spending. However, these costs are not evenly shared as only around one-third of households have mortgages,” Ranchhod says. 

Data from the RBNZ’s last Financial Stability report shows households with mortgages are already spending about 15% of their income on interest payments.

But it’s not all bad news. The bank’s estimates indicate household incomes have also been pushing higher, rising by about 6% over the past year. That reflects the strong labour market and wages rising at a rapid pace over the past few years.

Ranchhod says solid growth in disposable incomes over the past year has meant nominal household spending levels up about 9%. “That continued growth in spending does point to resilience in spending appetites in the face of the other headwinds currently buffeting households.

“However, a big chunk of the rise in spending has been due to the 6.7% increases in household living costs over the past year.

“Adjusting for higher prices, the amount of goods that households have been taking home has effectively remained flat over the past year even as people have splashed out more cash. And some of the increase in overall household spending has been on outbound tourism, which for the most part does contribute to the local economy,” he says. 

Westpac expects the pressure on households’ finances will continue to mount.

Ranchhod says that’s mainly due to the continued rise in debt servicing costs. “At the same time, even though inflation is starting to ease, cost of living pressures remain intense. Those pressures are being felt by every family across the country and they’ve been especially tough for those families on lower incomes due to the large increases in the prices for necessities, like food and utilities”.

That will mean many households will need to rein in spending. Many of those families will also typically have smaller savings buffers they can draw upon.

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