Mortgage anxiety intensifies: How Kiwi borrowers got caught out by rates shift

Just when buyers thought mortgage rates had peaked, they’ve increased again. And they’re unlikely to start falling in February as previously predicted, experts have told OneRoof.

This week, the Reserve Bank of New Zealand kept the Official Cash Rate at 5.5% - its first pause in almost two years – but signalled that interest rates would remain at a “restrictive level for some time” to ensure inflation returns to its target rate of 1%-3%.

The news followed mortgage rate hikes by the main banks that are set to hit borrowers’ finances hard.

ASB’s standard six-month and one-year rates went up to 7.25%, its 18-month rate to 6.95% and its two-year rate to 6.79%. Some of the other rate rises included Westpac’s two-year fixed standard rate, which rose to 7.39%. Kiwibank’s two-year rate rose to 6.59%, and ANZ’s six month and one-year fixed rates to 7.79%.

So why is it that mortgage-holders are now facing increased bills when the Reserve Bank had indicated that the cash rate had peaked, and most experts thought so too, with some predicting that the OCR might be cut early in 2024? Were the forecasts spectacularly wrong or were the main banks looking to gauge their customers? The reality is more nuanced.

In its statement on Wednesday, the Reserve Bank's Monetary Policy Committee noted that the hike in mortgage rates was a “response to higher wholesale rates".

"The lagged effects of previous monetary tightening is still passing through to households as more households move off lower fixed rates,” the committee said. “Average mortgage rates on outstanding loans have increased from about 3% in early 2022 to about 5% currently. Based on current commercial bank pricing, average mortgage rates are expected to reach around 6% in early 2024."

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Kiwibank chief economist Jarrod Kerr told OneRoof the consensus around interest rates had changed in the space of a few weeks. A sharp rise in two-year “swap rates”, from sub-5% to 5.75%, meant banks were having to pay a lot more for the money they borrow offshore to lend to homeowners and buyers in New Zealand.

Kerr said the jump in swap rates priced in another hike in the OCR, although he doesn’t believe that will eventuate. “The two-year rate incorporated an OCR hike to 5.75%, and no rate cut until very late in 2024. We disagree with market pricing.”

For homeowners who may be confused by the ups and downs of interest rate predictions, Kerr explained that the market “is constantly trying to figure out whether the OCR is going up, down or sideways, and sentiment around that changes all the time. Only a couple weeks ago, the market had [OCR] rate cuts priced in from February next year. Then interest rates lifted globally and expectations of rate cuts were removed.”

Economists and the market now believe the Reserve Bank won’t cut the cash rate until October 2024, which is line with the Reserve Bank’s forecasts. “That's a big shift in expectations,” Kerr said.

ANZ’s economists said there was a real risk that the Reserve Bank would have to raise OCR beyond 5.5% this year. “Our OCR forecast remains unchanged: we’ve been clear we don’t expect the RBNZ or the market to come around to our view that more is needed until much later in the year,” they wrote after the Reserve Bank’s announcement on Wednesday.

Kiwibank chief economist Jarrod Kerr says the market is constantly trying to guess the direction of interest rates. Photo / Fiona Goodall

“There’s certainly a lot of water to flow under the bridge before the end of the year. While on balance we see the risks as tilted to the OCR still needing to go a little higher, there are risks that could see the RBNZ cutting rates by year-end.” The Reserve Bank, ANZ’s economists concluded, remained in “watch, worry and wait” mode.

Easy Street mortgage advisor [broker] Gareth Veale said the potential of more mortgage rate rises was making some of his clients nervous, adding the recent increases were another twist of the knife. “People are upset because they don’t understand the OCR and the way banks are funded to provide loans,” he said.

Not all homeowners have rolled onto higher rates yet, because the vast majority fix interest rates for a year or two. Veale hoped that once people do roll onto higher interest rates they will curtail spending, which will help dampen inflation. “People who are on higher interest rates are not spending money the way that they used to. Disposable incomes have shrunk hugely,” he said.

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