Growing repayments due to rising interest rates are making the dream of being mortgage-free further out of reach for homeowners, with some adding 10 years or more to their loan terms.
Most homeowners have not been able to find the extra hundreds of dollars a week needed to service the higher interest rates that are now hovering around 7%, and have instead tacked it on to their loan terms, mortgage brokers said.
EasyStreet Mortgages financial adviser Gareth Veale has not met one client who has been able to find the extra money to meet the increased repayments so instead their home loan term has ballooned out.
Veale said some people have had to push their loan terms out to 30 years – the maximum amount allowed – just so they could afford it.
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A person paying $800 a week at a 2.5% interest rate who has just re-fixed at 6.99% suddenly has to find an extra $300 a week to service it.
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Veale said finding that much extra money was unrealistic for a lot of people so instead they would extend the loan term, which in this case would go from 14 years to 26 years.
“They might increase their payments somewhat, but I haven’t even had one who is capable of meeting the same terms.”
However, Veale said the hope was that interest rates would eventually return to a more normal rate and the loan term would shrink back.
Westpac is forecasting the Official Cash Rate will begin to drop from August next year and could slowly come down, but not to the same low level it was around Covid.
Westpac chief economist Kelly Eckhold said homeowners could start to see some relief again in about 18 months' time.
EasyStreet Mortgages financial adviser Gareth Veale hasn't had one client who hasn't had to extend their loan term. Photo / Supplied
When interest rates were going down people were keeping the repayments the same and paying off their loans faster to shorten the term of the mortgage and now the reverse was happening, he said.
“We think there’s been a trend to reversing that as these interest rates go up, and that obviously helps households with their cashflow because they don’t have to devote a lot more dollars now, but it does obviously lengthen the term of their mortgage.”
Total Mortgages director Jordan Cameron said the higher interest rates was impacting current mortgage holders more than new purchasers who were already prepared for it.
“It’s the ones coming off their fixed rates that are looking at going on interest only, taking mortgage holidays or extend out their loan times,” he said.
“We are seeing a lot of people wanting to make changes to their loans. They’ve done their budget and realised they are starting to struggle or they are going to struggle and start making amendments to it.”
People were also thinking there might be some “miracle rate around the corner”, but there wasn’t as most banks were offering similar rates, Cameron said.
“You might be going from 6.99% to 6.89%, but there’s not like a 5.99% or something like that out there for a year.”
As a result, most people were just re-fixing for 12 months in the hope that rates would drop in that time.
“We do expect them to start easing at the end of next year so hopefully that happens for everyone's sake.”
Canstar NZ general manager Jose George said Kiwi households were feeling the pressure right now with a recent Canstar survey showing more than half of mortgage holders were worried about affording repayments as interest rates rose.
George said homeowners could manage this stress by firstly considering their day-to-day finances such as pulling back on nice-to-haves such as eating out, entertainment and new clothes.
Restructuring a loan was also an option, he said, but warned people to think about this carefully and only do it as a temporary measure because it would end up costing more long-term.
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