As mortgage rates climb putting homeowners under stress, arrears are rising by as much as 50% in some regions. Data from credit agency Centrix shows a 24% increase in arrears nationwide in 2022.
In Auckland, which accounts for a third of the country’s population, arrears have risen by 41% over the same period. In Hamilton, the rise was 33%, while in Wellington and Christchurch the increase was 15% and 8% respectively.
The worst hit district in the country is Waitomo with a 50% increase in mortgage arrears. Other districts that are hard hit include Western Bay of Plenty 43%, Ruapehu 39%, Matamata-Piako and Kaikoura 37%, Kawerau 33%, Tasman 34%, and 32% for Rotorua.
The absolute numbers for arrears is still relatively low, despite the stress some homeowners are feeling with mortgage interest rates trebling.
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In Auckland, for example, the percentage of borrowers in arrears has jumped from 1.49% to 2.11%, according to the Centrix data. That means just over two homeowners per hundred are in arrears with their mortgages.
Only the Far North District exceeds 3%, with 3.05% arrears at December. That’s slightly more than three per 100 homeowners who have been missing payments.
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Nor do arrears directly lead to mortgagee sales, says James Wilson, head of valuations at OneRoof’s data partner Valocity. “Kiwis have always tightened up in other places to pay the mortgage. It’s part of our mortgage psyche.
“If you look at other parts of the world, they have had far higher arrears, especially around events like the GFC [Global Financial Crisis].” Wilson says there is a different mortgage culture in the United States and some other countries where homeowners can simply hand the keys to the bank. Here in New Zealand, banks will still chase homeowners to make up any shortfall after a house is sold at mortgagee sale.
“The second observation is that there are different categories of arrears. Not all arrears are created equal. There are arrears where there might just be some slight delays for a couple of payments. Short-term blips. [Other] arrears will be more significant where the borrower is approaching default territory. Even then it might be that the bank is fully across that with the borrower,” says Wilson.
Banks are required under the Credit Contracts and Consumer Finance Act (CCCFA) to offer hardship arrangements to borrowers who are struggling to make repayments. That is providing they are in default for less than two months and have missed no more than four consecutive payments. The banks can make arrangements such as deferring or reducing loan repayments, restructuring and consolidating loans, altering repayments to interest only in some cases, and waiving certain fees and charges.
Valocity head of valuations James Wilson: “Arrears will be more significant where the borrower is approaching default territory.” Photo / Fiona Goodall
“New Zealand banks adopt a very prudent way of identifying early, and then working with borrowers that might be close to arrears or approaching default,” says Wilson.
If borrowers still can’t pay, banks may encourage them to sell the home themselves to avoid mortgagee sale. “If an owner sells the property on the open market it sometimes produces a better outcome if the market allows,” says Wilson. This can be easier in some markets than others.
Where homes have fallen in value below the outstanding mortgage (known as negative equity) banks may not allow the homeowner to sell. Those homeowners most at risk of negative equity are those who bought property in 2021 with low deposits and have seen the value of those properties drop below the outstanding mortgage.
While mortgage rates may be at the peak currently, many homeowners haven’t yet transitioned to the higher rates from earlier fixes. When they do they could face more financial pain.
CoreLogic chief economist Kelvin Davidson says 50% of mortgages by value are fixed currently and another 10% on floating. “That’s 60% [of mortgages] exposed to rate changes,” he says.
CoreLogic chief economist Kelvin Davidson says unemployment figures will have more of an influence on mortgagee sales and mortgage stress. Photo / Getty Images
“You can't be 100% sure about what the change will be, because we don't know when most people originally took the loan out. But I think it's fairly typical that those people repricing the next 12 months will still be, to put it really simply, going from a low rate to a high rate,” says Davidson.
“They'll probably still be looking at going from four-ish [percent mortgage interest rate] up to six and a half-ish [percent].”
Davidson also says arrears increases aren’t necessarily an indicator of where mortgagee sales will occur. Job losses are more likely to be the deciding factor.
“We can look at areas that have high house prices. That's where the mortgage is the biggest, but also they have higher incomes. So it's not necessarily an indicator of stress where all else is equal. The indicator of stress is probably where unemployment has changed the most.”
Homeowners who work in regions or sectors likely to struggle economically going forward might be worse hit than those who keep their jobs and find ways to pay the mortgage.
During the pandemic tourism struggled, for example, and some homeowners lost their jobs, says Davidson.
“Now it's a bit different. It might be construction in parts of the country that have and a lot of construction [that suffer job losses]. It could be Canterbury, Auckland.”
