‘Can I really afford it?’: Fears for mortgage holders as cash rate jumps to 5.25%

The 0.5 percentage point hike in the Official Cash Rate by the Reserve Bank of New Zealand today is expected to put further pressure on Kiwi homeowners.

Many commentators had been expecting a more modest increase of 0.25% percentage points – which will have been priced into current mortgage rates – so the decision may mean future increases in mortgage rates are on the cards.

The jump follows a decision by the Reserve Bank of Australia to pause hikes in its cash rate.

The Reserve Bank of New Zealand said in its statement today that inflation “is still too high and persistent, and employment is beyond its maximum sustainable level”.

The bank's Monetary Policy Committee said “credit conditions have not tightened substantially and while increasing, arrears on mortgages and other debts remain at low levels”.

The committee also noted that “current monetary policy settings would continue to put downward pressure on house prices, consistent with prices returning to more sustainable levels”.

Data released this week by NZ credit agency Centrix showed a spike in the number homeowners falling behind in their mortgage payments.

There were 18,900 mortgages that were in arrears in February, up from 18,400 in January and up 23% year-on-year.

Centrix managing director Keith McLaughlin expects more households to come under pressure, with around 50% of existing home loans, by value, set to roll onto higher interest rates within the next 12 months.

“Our latest data shows mortgage arrears climbing for the seventh consecutive month, which could point to many being unable to service these higher mortgage rates – a difficult situation for anyone to be in,” McLaughlin said.

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CoreLogic chief economist Kelvin Davidson said that theoretically borrowers who are currently on rates of 2%-3% should be able to cope with rates of 6.5%-7%, as many will have been tested at the higher rate when they took out their loan. But in reality, not everyone can cope with a sharp rise in their mortgage repayments.

“It’s one thing for the banks to say, ‘Yep, you can afford your mortgage at 7.5% or 8%’ but I wonder if the borrowers themselves have actually thought, ‘Can I really afford it? What would I be prepared to sacrifice?’.”

Davidson said that high inflation was amplifying the effect of rising mortgage interest rates because it costs more to buy goods and services.

“This means that many households will need to readjust their budgets, and that will remain a restraint on the wider housing market for a while yet.”

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While the jump in mortgage rates is squeezing household finances hard, so far mortgage-holders are showing resilience.

Davidson said: “It’s worth noting the repricing process to date has been fairly smooth. So far, loan repayment problems remain very low. However, we should still be mindful of recent Centrix data reporting a lift in borrowers missing repayments.”

Davidson believes minimal job cuts will be a helpful buffer. “Over the coming months, the unemployment rate is expected to rise. However, on the Reserve Bank’s projections, this isn’t expected to be about mass job losses. It’s actually about more people coming into the labour force, but struggling to find work as new job creation slows down. In other words, people who already have a job and a mortgage should be somewhat insulated over the coming months, helping them to manage higher repayments.”

There is good news for those who can hang on and keep paying their new higher rates. Davidson expects by the end of the year fewer homeowners will be moving onto higher rates. “Most repricing events from then on will be from ‘high to high’ in terms of mortgage rates, rather than the ‘low to high’ as we’re currently seeing.”

CoreLogic chief economist Kelvin Davidson: “Many households will need to readjust their budgets.” Photo / Peter Meecham

Research released last month by consumer advice site Finder found that 45% of New Zealanders were “somewhat” or “slightly” stressed by their mortgage payments. Mortgage repayment stress was second only to grocery stress.

“Borrowers aren’t accustomed to higher repayment amounts and each increase will be causing extra pain,” Finder’s editor at large Angus Kidman said.

Meanwhile, Canstar’s Consumer Pulse Report 2023 noted that two-thirds of mortgage-holders have or plan to cut back on spending across essential and non-essential items, due to the increased cost of meeting higher mortgage repayments.

Mortgage broker Gareth Veale of EasyStreet Mortgages said homeowners should prepare their finances for higher repayments. “Don’t get yourself [in trouble] by racking up debt. Print off your bank statements and go through every transaction line by line and work out whether [the item] is essential. Truly work out what’s needed versus what’s discretionary.”

Veale said he had been encouraging his clients to ask their employers for pay rises. Some had negotiated pay rises higher than the rate of inflation. In one case, a forklift driver negotiated his hourly rate up from $22 to $28.

“If you've been with an employer for a while and you haven't really had much of a pay increase, then ask for one,” he said.