Property owners could be forced to sell

Continued interest rate hikes are possibly going to leave some property owners with no choice but to sell if they can’t service the new mortgage rates, says the founder of mortgage broking franchise network Mike Pero.

Tuesday, June 12th 2007, 4:56PM

by The Landlord

Almost all fixed lending rates are likely to be in excess of 9% since the Reserve Bank raised the official cash rate (OCR) last week, says ANZ chief economist Cameron Bagrie – a “massive” level for first time buyers.

To put this in perspective, says Bagrie, to a typical first time buyer looking at borrowing $250,000, the increase in fixed lending rates over the past three months of close to 100 basis points has increased the weekly cost by almost $40.

The magnitude of increases in interest rates over the past three months is “massive”, he says. A two-year fixed mortgage is now likely to be 100 basis points higher than in February – and this is similar for a five-year rate.

“There is nowhere to run,” says Bagrie. “Almost all fixed lending rates are likely to be at or above 9%. Borrowers typically shunted along the yield curve previously when their mortgage came up for renewal, leaving cash flow unchanged. The recent sizable increase in longer-dated lending rates has removed this option.”

“It is the speed of the change that may be potentially a very effective policy tool if it dents the bullet-proof persona of the housing market,” Bagrie says.

Certainly the latest OCR hike was not met by the same “Higher rates, who cares” headline that followed the Reserve Bank’s March Monetary Policy Statement.

Pero says Kiwis are finding it hard enough to get a foot on the property ladder, “and the Reserve Bank decision is in effect increasing interest rates and failing to offer tax cuts to mitigate the effect on a property owner’s disposable income”.

“New Zealand is becoming a nation of renters,” says Pero, “and this trend may well continue with Kiwis being unable to enter the property market, and an increasing number of off-shore investors buying prime New Zealand land”.

“My advice is for property owners with mortgages to talk with their mortgage broker to review their mortgage structure and look to secure competitive fixed rates to weather the storm of these effects over the next few years.”

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