New homeowners are having to divert half their monthly income to mortgage repayments, thanks to the recent spike in house prices and rising interest rates, new analysis shows
Research from CoreLogic found that the percentage of income required to service new mortgage debt had jumped nearly 20 percentage points in just two years.
The figure was calculated based on the national average gross household income of $117,947 paying a new mortgage with only a 20% deposit at a fixed two-year interest rate.
CoreLogic chief economist Kelvin Davidson said the figures really showed the current situation for people just getting on the property ladder because not only do they have to save hard for the deposit, they also have to factor in higher repayments.
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“Now I think there’s a double whammy because it’s still hard to get the deposit, but now mortgage rates aren’t 2% any more, they are 5 or 5.5%.”
In 2020, about 31% of an average household income was needed to service a mortgage.
“It’s suddenly shot up to 50% and that’s just reflecting the rise in house prices and the rise in mortgage rates. Now those recent buyers, not only do they have to raise a big deposit, but then once they’ve got the mortgage it’s quite hard to service it,” Davidson said.
The 50% figure is expected to remain relatively unchanged for the next 12 months as falling house prices and a slight increase to the average household income offset a further expected rise in interest rates from about 5% to 6.5%, the analysis shows.
Davidson said some people who had put the brakes on house-hunting while house prices drop may decide to rethink this approach given the analysis shows they will be paying the same amount today as they would be in a year due to higher interest rates.
When interest rates last hit 6.5% in 2014, people were spending 35% of their average household income on paying the mortgage. Last year, when interest rates were much lower, the percentage of income needed to service a mortgage was 31-32%.
CoreLogic chief economist Kelvin Davidson says Kiwis are "having to pay a lot more on their mortgage". Photo / Peter Meecham
Davidson said the figures showed how unaffordable house ownership had now become.
“The point is 50% is way above the 35% that prevailed last time mortgage rates were at this level. It just showed what’s changed in the meantime and house prices have risen really quickly, meaning that even though interest rates will be the same as they were back then, people are having to pay a lot more on their mortgage because the mortgage is bigger.”
The last time New Zealanders had to dedicate 50% of their income to repaying their mortgage was in 2007 - just before the Global Financial Crisis.
EasyStreet Mortgages mortgage adviser Gareth Veale said people are finding it a lot harder to service their mortgages now and some are getting desperate. “I had two clients ask me today whether or not a 30-year loan term was the highest a bank can go and can they go to 40. I’ve never had that question before," he said.
“They were just trying to wrap their heads around how much they were paying. It's a lot harder than it was last year.”
Mortgage Managers mortgage adviser Stuart Wills said in most cases a first home buyer with a lower deposit needed more than the average income to buy a house, especially in the larger centres. “It is hard for those first-home buyers, but I suppose it has always been hard to a degree as well.”
Financial Advice New Zealand chief executive Katrina Shanks said as interest rates increased even more pressure would be put on households that have big mortgages due to the rapid increase in house prices in the past few years.
“For many those rising costs will be substantial and they will have to think very hard about affordability of their mortgage going forward and at what point it puts too much pressure on them; they will have to look at other options.”
Other options could include selling, getting in flatmates, renting it out, going to the bank of mum and dad for a top-up or getting second jobs.
While banks already do stress-testing to allow for higher interest rates, she said it was “really the perfect storm” between increases in interest rates and household costs with the rate of inflation.
