As mortgage rates rise, so too are the test rates banks use when assessing whether those applying for mortgages can service their debt, should conditions change in the future.
New Zealand’s largest bank, ANZ, told interest.co.nz those applying for mortgages currently need to be able to satisfy the bank they would be able to service debt at an interest rate of 6.7%.
Meanwhile ASB said it’s testing applicants using a rate of 6.85%.
The two banks’ standard 1-year to 5-year fixed mortgage rates range from 4.49% to 6.45%.
ASB said it is in the process of reviewing its test rate in response to recent interest rate changes on the back of the latest Official Cash Rate (OCR) increase.
ANZ made a more general comment that its test rate is “regularly reviewed in line with the changing interest rate environment”.
The other major banks - BNZ, Kiwibank and Westpac - wouldn’t share their test rates, but similarly commented on how they’re regularly reviewed.
Room for test rates to rise?
Looking ahead, test rates are likely to rise, along with the OCR and mortgage rates.
If banks' test rates are derived by them adding similar margins to the OCR, or average 1-year mortgage rate, as they have in the past, their test rates are due to surpass 7%.
Reserve Bank (RBNZ) data shows the buffer between the average 1-year mortgage rate (which is currently 4.1%) and the average bank test rate sat at 3-4 percentage points between 2017 and 2021.
Similarly, the buffer between the OCR (which is currently 1.5%) and the test rate hovered at around 6 percentage points between 2018 and 2021.
The RBNZ expects the OCR to peak at 3.4% in this tightening cycle. It couldn't tell interest.co.nz what the average test rate was in 2015, when the OCR was last this high.
Someone wishing to borrow $500,000 over 30 years would need to satisfy their bank they could make repayments of $806 a week if they were tested at 7.5%.
That's $62 a week more than if ANZ's current test rate was used, and $249 a week more than what someone would pay if they fixed at 4.1%.
RBNZ could set the test rate
The RBNZ is considering setting a minimum test mortgage rate for banks. It consulted on this between November and February and is likely to have more to say about it when it releases its Financial Stability Report on May 4.
Its proposal was to impose a minimum test rate to “address short-term financial stability risks” while it works with banks to establish a debt-to-income (DTI) restriction regime.
The RBNZ didn’t specify where it would set the test rate, but modelled the impacts of it being at 7% and 8%.
The RBNZ said it could introduce a minimum test rate sometime between April and June, as a stop-gap measure, ahead of implementing DTI restrictions by the end of the year.
The RBNZ said it’s “unlikely” it would impose a minimum test rate and DTI restrictions simultaneously.
DTI restrictions would limit the amount of new mortgage lending that could go to borrowers with low incomes relative to the amount of debt they sought.
The RBNZ noted there were a number of approaches it could take to setting a minimum test mortgage rate.
Its counterpart in Australia requires banks to test applicants at a rate 3 percentage points higher than the rate of the loan product they’d like.
The RBNZ said its preference was to add a fixed buffer to a benchmark rate. While it noted the OCR is closely linked to mortgage rates, it said a longer-term rate like a 5 or 10-year swap rate might better reflect long-term trends in interest rates. It said it could review the test rate quarterly.
The RBNZ’s preference was to ensure the test rate was stable over time, moved automatically and was the same for all mortgage applicants - investors, existing owner-occupiers and first-home buyers alike.
It recognised the policy would hit first-home buyers particularly hard, hence the reason it suggested a minimum test rate only be used as an interim measure ahead of implementing DTI restrictions.
The RBNZ has long wanted to be able to impose debt serviceability restrictions. Finance Minister Grant Robertson gave it the ability to do so in 2021, as he was coming under pressure over soaring house prices.
The housing market and interest rate cycle have since turned. In any case, lending restrictions the RBNZ imposes would need to support the stability of the financial system as a whole, rather than specifically target house prices.
See interest.co.nz's mortgage calculator here, and a table comparing mortgage rates between banks here.
111 Comments
“When you choose an action, you choose the consequences of that action.
RBNZ and Government wanted to pump up ....So they did by choosing action of removing LVR under zero interest environment.
When you desire a consequence you had damned well better take the action that would create it.”
And they did took action of printing and supplying cheap and easy money.
“We all make choices, but in the end our choices make us.”
So why is RBNZ panicking, now.
"It couldn't tell interest.co.nz what the average test rate was in 2015, when the OCR was last this high".
No, it couldn't because they have always been far too arrogant to go and talk to the man on the street about what is actually happening in the economy.
Not a new phenomenon. Check out this wiki article on Black Monday 1987 and the fact rbnz made the recession worse, not better:
People who have purchased house in last 3 year what would be average mortgage size in Auckland. Million plus mortgages will be so hard to service on average wages, once rates hit 7% on 3 year rate a lot of defaults will occur just not affordable, that 3 bedroom on tiny lot will cost average wage earners more than they have.
Yea, all of those 8 or 9+ DTI mortgages over the last few years makes you wonder what people were thinking… so long as the rental market holds up they’ll be ok. Though I predict a sharp rise in rent costs through investment sales incoming lowering supply and increasing demand (seems to be happening in Christchurch already), rents will follow the impending downturn in the market as prices ease into the new norm and everyday folk are able to afford to move into their own home, lowering rental demand and pulling prices down. There is enough housing in this country for the population afaik. How many vacant properties are there again?
... they wont admit it , but , these highly paid " experts " got it badly wrong , they overreacted , panicked ... flooded the system with cheap credit ... didnt think of the consequences ...
Now , we're going to cop the pain from their blunders ...
... they'll continue to collect their massive salaries , safe in their ivory towers ...
Yep - we had the highest house prices in the world (see link below) in 2019 and the muppets at the RBNZ thought it was a good idea to blow the bubble up a further 30-40%
https://www.economist.com/graphic-detail/2019/06/29/for-now-residential…
We're just lucky we have political leadership that understands the dynamics of the property market... and can explain it to her flock of sheeple so eloquently with wonderful hand gestures... (see video in link)
https://www.interest.co.nz/property/108301/pm-jacinda-ardern-says-susta…
I could not imagine Boris or Joe being so in touch with the market.
Certainly are muppets. Although I think that term is possibly too weak, given the damage they have caused to economy and society and which is going to worsen and become more apparent as the year goes on.
No one can be surprised that many of the RBNZ's most senior staff bailed by the end of last year.
They know it's going to get ugly, and that fingers will be pointed at the RBNZ in a big way (they already are, but the criticism will get louder as the economy gets much weaker).
Yes the strategy off issuing more debt against a housing market in order to prevent deflation in an economy is idiotic in the long run....works well in the short run...but it is simply a can kicking exercise.
Its avoiding the pain that you need to face in order to grow stronger....but its exactly what weak characters do...(avoid the necessary pain they need to in order to move forward with their lives...same goes with countries and economies).
We've had weak leaders that have avoided pain for their short term popularity, but ultimately that is going to make the pain worse at a future point.
Agreed IO. I think the can kicking habit arises from the fact that the people in the power positions, know their jobs are of short tenure. By that, I mean that if you or I see a problem that affects us, and we don't address it, we will personally have to deal with a bigger problem later on. Not so with the RB or government, if a problem arises, all they want, is the problem not to blow up under their watch, so there is actually an incentive to kick the can, the next governor or prime minister will have to deal with the bigger problem, not the current one
I never noticed it until I say it on a comment here somewhere, now whenever JA talks on camera, I always get distracted by the flappy hands.
And the waffle... sooo much waffle. I just find it hard to stay concentrated for so long... its like listening to a church sermon...
The RBNZ are clearly panicking if they are looking at stepping in and overriding banks on the stress testing levels. Obviously the more stable the economy the higher the level of interest rate set. Maybe there is sudden panic because clearly the current 7% is not looking high enough.
I am amazed they weren't doing this to begin with. I heard of some banks stressing testing people in the 5-6-7% level range. In the 5's IMO is very low and looks like it will be exceeded. It is crazy some of the lending that has gone on IMO during the period of crazy high house price inflation. Unlike normal inflation, such as on food, which is like a ratchet and beds in, I can see house prices falling back, as people that need to sell will be forced to accept lower offers to move on. But they will likely still be making a huge capital gains unless they purchased more recently.
There's one part of the equation that affects mortgage repayment ability and that is household expenses. Isn't this where the CCFA raises its head asking for how many lattes and hamburgers the family have a week?
I also thought that the major banks passed RBNZs bank stress test with flying colours. This begs the question “address short-term financial stability risks”. Are the banks really at risk or is RBNZ been "told" by the govt they want as close to zero repossessions as possible and so short-term financial stability risks are used as an excuse.
"DTI requires them to have great amounts of the one thing most do not. Real equity"
Sorry Avergeman, but despite the many thumbs up, your post is incorrect. DTI stands for Debt to Income, there is no "Equity" requirement in DTI. What the DTI requires in order to borrow lots of money, is Income, not Equity. The Equity you speak of, is included in the LVR, it's the "V" part which stands for Value.
You are very right
Anyways, with interest deductibility out, many (most?) of the multi-landlords will have much less leverage to compete with FHB with just salaries.
The I part of DTI will be very damaged, with current yield.
house prices must go down or salaries must go high (or both) to have a decent yield from rental properties. Until then I thing is going to be a stupidly dangerous bet to increase leverage.
But if you have more equity, then you need less debt. So despite not directly being in the 'DTI' definition, it is still a critical factor in understanding how it would/could impact the market.
If you have very little equity, then you will need more income to offset the amount of debt you will require (if you want to purchase additional properties in a portfolio for example).
While it would seem to make sense, I don't think they include equity in the debt calculation.
If you have a property valued at $800000 but had no mortgage then your equity is $800000 and your debt is $0. Straight forward that.
If your mortgage is $500000, then your equity is $300000 and your debt is $500000, however, if your property was worth $600000, then your debt is still $500000 but your equity is $100000.
They do not deduct equity from debt for the simple fact you cannot simply liquidate that equity. If you needed it quick, you'd probably have to sell for less than it's value, so debt is debt and income is income.
I think what the original post could mean by "real equity" is the amount you bought into buy that particular property. If you buy a $1,000,000 house with a $500,000 deposit you have less debt than is you buy with $0 deposit (cash) if you are a property investor you do that since you own another property. say that to is $1,000,000 and no mortgage you have an LVR 50%. No amount of previous properties will help you need to be able service that house with the income that house generates plus any extra you can afford from other income. This becomes very limiting when you start doing this over multiple properties, if rent doesn't cover expenses.
So if you had a first property worth $1m and no mortgage, and a second property worth $1m with a $0.5m mortgage, then you still have $0.5m of debt and $1.5m in equity.
If you paid the $0.5m deposit on the second property by using the equity in your first property, rather than cash, then doesn't the debt depend on how that equity was released?
You could still have $0.5m debt but your equity is now only $1m, or you could have $1m in debt and $1.5 in equity.
I guess it's not something I'm familiar with since I'm a single home owner and not a property investor.
Wonder if the test rates will be double digits a year from now? It’s looking that way.
This can not bode well for the housing market. Real after tax incomes have already been eroded by the huge rises in necessities such as food and petrol. People just won’t have the incomes to take on mega mortgages if they are being stress tested at 10 percent
It’s important to understand the greater picture. Inflation has lagged behind wages for over 10 years. That is CPI vs Labour Cost Index. For 10 years things have been getting cheaper and cheaper as we borrow more and more for imaginary housing inflation.
We should not at all be alarmed by current inflation as wages are so far ahead it’s minuscule in comparison. What’s cause for alarm is that while wages have increased at nearly twice the rate of inflation for about 15 years, housing has quadrupled in “value”.
Income has been eroded by rent and irrational DTI. Not inflation. Inflation only hurts now because there is so little left after paying for an imaginary “value” in housing.
Here’s some simple maths to illustrate the real problem RBNZ is trying to solve.
Proportion of income paid as interest is:
Rate * DTI
So, at 5% interest and a DTI of 9:
5 * 9 = 45
That is 45% of income paying interest alone. Those not in tune with inflationary pressures may fix for short term and be cut deep next time they refinance, some may skip these pressures altogether. Some big risks out there though…
Edited to simplify the math
That depends on whether DTI considers gross income or net income.
Edit: that’d be gross income: https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Statistics/tables/c4…
And the statistics on DTI: https://www.rbnz.govt.nz/statistics/c40-residential-mortgage-lending-by…
Wages maybe ahead of the CPI but I believe CPI is basket not a very accurate indicator the actual increase costs people are incurring. Things like tvs, computers, etc have not really changed in price or even gone down for the equivalent product, but they are non-essential. Essentials like food, rent, power have been going up much faster.
No it does not. My view is: watch the Fed not the reserve bank. US markets pricing large hikes possible recession then cuts a couple years after. Right now they hope they can crater markets and income to prevent governments paying more for their debt. Nz doesnt hold all the cards. Never has.
Higher interest rates, high servicing requirements, higher cost of living, tightening credit conditions, low migration, increasing supply, high debt to income levels... How far prices fall is anyones guess but the perfect storm for the market is brewing. Higher material costs and the migration taps being turned on may help to put a floor under the market but it may not be a very strong floor. The next 6 to 12 months will be interesting.
Higher material costs won't "put a floor" (ha) under the market. Houses are worth what people are prepared to pay for them, not what they cost to build.
As for immigration, they won't be running around buying houses any more than the people who are already here, and for the same reasons.
Markets are driven by human sentiment. Once that turns, there's not much to prevent prices falling.
Combined with other factors they may help to put a shaky floor under certain parts of the market that have constrained supply. Matakana for example has a lot of demand at the moment but very little supply. The cost to build is high so prices in that area are still holding up ok. Supply shocks and cost to build preventing loads of new stock coming on any time soon.
So the RBNZ might set the stress test rate themselves in the future, but will the set the stress test formulas that execute using it? If it is up to the bank then they can continue to do what they like within the space of the CCCFA
"You've allowed $200 per week for property upkeep but we can make that $100"
"Transport costs? Don't forget these are half price at the moment"
"your university age children don't need to live at home"
--- "Looks like you can afford the stress test rate after all"
One thing I'd love see covered here is the RBNZ's ongoing review of mortgage bond collateral standards. The implementation of this has been delayed now until after the FLP ends (December 2022), apparently because banks are using mortgage-backed securities as collateral for their FLP drawdowns, and tightening requirements now would impact their ability to offload bad debt on to the Reserve Bank if and when the housing market turns this year. It will be interesting to watch. Changes to the RMO framework could be one mechanism for forcing banks to tighten their lending standards, although true to form, it's likely to be too little too late.
As Roger Kerr points out in the other article, and what I've been saying here for a while, is that we've used imported deflationary pressures from globalisation (cheap imported goods/tradable inflation) to justify pushing the interest rate down...resulting in lower mortgage rates...
But that doesn't make any sense...because what we have been doing is saying:
RBNZ - 'hey look NZ consumer, everything is getting cheaper because we can import cheap goods from China/Vietnam....so to solve the problem what we are going to do is create more demand for these goods by making you feel wealthy by allowing more debt to be created against the housing market and increasing the prices of these assets'
FHB Consumer - 'ok great, I can now afford a million dollar mortgage'
Older Consumer with mortgage - 'ok great, my mortgage is cheaper now so I have more free $$ to compete with other consumers for the goods and services in our economy, generating demand and preventing the economy going into a deflationary spiral from the imported deflationary forces that we're being created from globalisation'
Flash forward to the 2020's - global deflationary forces are gone...and we are now importing non-tradable inflation...keeping interest rates at such low rates is just going to make it worse and we no longer need to stimulate the economy to counter the imported deflationary forces from globalisation over the past decades.
We need much higher mortgage interest rates to reduce demand on the limited number of goods and services in order to keep prices from spiraling out of control. In theory it will reduce the amount of debt that can be issued against housing, reduce the amount of mortgage payments people can afford to pay, and reduce demand for the limited goods and services now in the economy (also bad for growth and could well cause a recession/depression....but you can't have your cake and eat it too which appears to be the thinking the past 20 years or so and avoiding the pain that is need to bring about financial and social stability - which we don't currently have....)
Overall, to me, the strategy of dropping mortgage rates to counter imported deflation is a stupid concept and has been very damaging to our economy/society....there shouldn't be an inverse correlation between tradeable inflation (i.e. cheap imported goods) and interest rates/housing prices. I.e. if we can import cheap goods, we shouldn't just issue more debt against housing as a result to prevent deflation - that is insane! Its a fools paradise. It has got us in the mess we now find ourselves. We need some much bigger thinking in our central government/reserve bank. DTI ratios will be a good start to prevent it happening again but it will be painful to make the adjustment.
Very nicely described our current situation, would it be possible for decision-makers to read it through and learn something.
I don't have faith in current decision-makers, who learn that property prices will increase after reducing the interest rate by doing (reducing) it rather than learning it as part of the lesson of economics which I believe should be their forte.
Lol - the assumption is that house prices don't fall....(as interest rates rise).
i.e. less debt to service at a higher mortgage rate = zero sum game/change to FHB affordability.
But would banks be less likely to extend credit to a FHB or a property investor whose portfolio is falling in value and equity eroding? Now that is a better discussion to have.
Interest regulations would impact FHB more than investors as investors have an easy out of passing the cost on to renters (for now…)
The greater point OP missed is how DTI benefits FHB more than most investors. FHBs with a double income in particular will be run through the stress test and those that come out the other side will pioneer new housing affordability. That’s the idea anyway, whether or not that flows through is another question.
Anyway, OP the value of a house is what the buyer is willing (able) to pay. That’s been blown out of the water over the last couple of years with easy low interest money. Yes these regulations negatively impact buyers in the current market, the point is that they will impact buyers across the board and there will be no need for any more average wage earning million dollar mortgages, putting stress on the market and resulting in a market “correction”. Find 20 investors who could purchase a million dollar home with LVR of 40, DTI of 5 and 6% interest mortgage…. I’ll wait
The party is definitely over. Please check the financial guru Martin North to understand what is really happening in NZ and who is to blame for the mess
https://www.youtube.com/watch?v=E7NVodjKNzQ&ab_channel=WalkTheWorld
"Financial Guru Martin North" Thanks for the laugh. He said house prices would fall in 2016, then being wrong, he said they would fall in 2017, then in 2018, still wrong so he doubled down on even more elaborate graphs to show they would fall in 2019, then in 2020, 2021 but hey, he's finally right! prices are falling in 2022, what a guru!
Yep, I hate these kind of charlatans who take advantage of gullible people. Mind you, I'm not saying Martin North is bad at everything, if you want to learn how to make money by making YouTube videos, he is the man! You don't even need to provide anything of value in the videos
Good, I agree. Both ultra sure of themselves and their myopic worldview. Both making a living off either an ultra bear worldview (North) or an ultra bull worldview (Church).
So far Church has been 'reasonably' accurate, but that's not down to any skill on his part. It's just been circumstance, and the fact that the housing market was a one way bet, until it wasn't....yet he assumed it always would be a one way bet...
This year he's going to be shown up for the charlatan that he is. Forecasted small house price gains in 2022 - yet falls will be ...10%...20%.... or more???
Martin North is an idiot. I watched a vid of him walking around in the rain in Tauranga on building sites claiming it was a ghost town and there was nobody around to buy all the houses that were getting built, well no surprises really they all sold and went up 30% to boot. Total clown.
But didn't NZ banks also say that prices would fall in 2020? To be fair, it was the money printing and regular dropping of interest rates that kept on kicking the house price fall down the road. Each time rates dropped, it made houses more expensive. Then when they dropped to emergency low levels in 2020, it created a feeding frenzy, and many savers also jumped on the bus of buying property as their money was earning nothing while in a bank account. It was IMO such a bad decision, but countries all over the world were doing it.
Like me, he probably underestimated just how stupid and foolish our central bankers and governments are - and just how willing they would be to destroy the financial and social stability within our economies in order to protect a debt ponzi.
Creating more debt to solve a debt issue isn't a solution, it just creates more of a problem.
So saying that people are wrong, when the solution has been to create more of the problem - is completely insane.
For those who want to keep interest rates low, it's very simple guys. Stop spending money on anything. Just buy your basic necessities and don't purchase on any product, software, or service. If we can collectively do that, i'm sure Labour will then be "best friends" with the RBNZ and "pressure" them to lower rates again.
They change their direction quicker than the speed of light. One day it's lower rates to the ultimate lowest possibility. The next day it's increase rates at the highest possible speed.
If this is what leadership looks like, I fear for NZ and fear for the world. Don't need to pay Jacinda, Robertson and Orr their salaries. I'm sure ANYONE of us on this comment board can push the "Stop" and "Start" button ourselves.
Easier said than done. Everyone in the western world has become accustomed to a certain level of "lifestyle" and that's not going away anytime soon unless you put a gun to peoples heads .Looks to me like we are heading for the proverbial train smash and quite a few people have prepaid tickets.
Hmm....?
Given that most people are already 'pushing the envelope' financially when they purchase, does anyone really believe the stress test is what the banks have worked out that you can 'afford?'
I think many people are going to find out that their definition of what's 'affordable' is going to be different from the bank's definition.
I think we're at the point where some of us realise that the covid emergency was overblown in the first instance, firstly by our friends in the msm, then their friends in the govt health sector, followed by their friends in the beehive, to such extent, that they've over-panicked, over-printed, over promised & over-publicised things to the degree that we're so far out of kilter (balance) that the only way back is to over-protect the commercial banks for their over-greediness in their complicity with the govts unnecessary over-protecting us in the first place.
Jacinda. We don't need protecting. We just need you & your friends get keep your big mouths shut & do your job of making this once great small nation a great place to live, work & play, instead of giving everything that our grandchildren haven't even earnt yet to people today, who don't contribute anything to themselves, their families or the communities (or country) & probably never will.
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