We've got the king-sized mortgage - now we just need to pay it

David Hargreaves has a further crunch of the latest monthly mortgage figures and awards a chocolate fish to the investors for the biggest percentage increase in size of average mortgage this year

27th Jul 21, 2:23pm by David Hargreaves

They came, they saw, they uplifted titanic-sized mortgages.

As we reported earlier in the week, in June, $8.526 billion was advanced for mortgages in this country, the latest Reserve Bank figures show.

As momentous as such large figures appear, however, they can start to look a little meaningless till you try to break them down a bit and give them more street-level digestibility.

A good place to start is to attempt to break down the figures into what they work out per mortgage.

Now that we are up to the June 2021 figures we are now starting to get into a time that allows us more valid 12-month comparisons. In April and May of last year during lockdown the mortgage market virtually dried up, but by June 2020, as we were marching down the Alert Levels, more normal service was being resumed. In June 2020 $5.364 billion worth of mortgages were advanced, which compared reasonably favourably with the $5.441 billion advanced in the 'totally normal' June 2019 month.

Delving deeper

So, anyway, as you can see, we borrowed over $3 billion more in June of this year than we did in the same month a year ago. But does that tell us anything? Not of itself, really.

Some detail to spice it up a bit: In June 2021 there were 26,048 mortgages taken up - a hefty rise on the 21,985 mortgages taken out in the same month a year ago.

In terms of an average size of mortgage, in the latest month it works out at $327,320, a whopping 34.16% increase on the comparative $243,980 a year ago.

Those figures include all mortgages, countrywide, all categories.

Getting into the nitty gritty - we'll start with the first home buyers. I don't know about you, but I might have thought the FHBs would have had the biggest blow out in terms of size of commitment over the past year. In fact no - but I suppose we do have to consider they came from a very elevated position in terms of size of mortgage anyway. And percentages get smaller as figures get bigger...

But no matter. In June FHBs borrowed $1.649 billion, up from $1.09 billion a year ago. In the latest month there were 3018 mortgages taken out, up from 2416 in June 2020.

The average size pushed up to $546,390 from $451,150 - a 21.11% increase. Hefty enough. As I indicated above, I expected worse. Probably indicative of a grouping that's already close to the top of where it can go in terms of borrowing, do we think?

Owner-occupiers stretch out

Okay, moving on. The other owner-occupiers. We don't talk about this group much because they are the kind of quiet majority. Folks who are already 'on the ladder' and can therefore move around with some comfort.

But, I'm definitely going to be keeping a closer eye on this grouping the coming months, as they've seemingly shown a great willingness to take up the slack in the market that has been caused by the Reserve Bank (RBNZ) slamming tough (40%) deposit rules back on investors again.

And the owner-occupiers have been in the mood to splash some cash. In June 2021 they borrowed $5.365 billion, some 68.34% more than the $3.187 they borrowed in June last year.

In the latest month 19,646 owner-occupier mortgages were taken out, up from 16,181 in June 2020.

And the average-size of mortgage for the owner-occupiers increased to $273,080 from $196,960 - a 38.77% increase.

Then there were the now deposit-limited investors. The amounts they've been getting for mortgages have been quickly coming down. But those still able to get a loan aren't being shy about how much they ask for.

Less is more

In the latest month investors borrowed $1.436 billion, compared with $1.04 billion in June 2020. Numbers of mortgages taken out in the latest month were down - 3071 compared with 3169 a year ago. What that tells you is that the size of the loans went up quite a bit.

The average-sized investor mortgage in June 2021 was $467,600, up from just $328,180 in June last year - a 42.48% increase, which as stated above, earns the investors a chocolate fish.

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What do we make of all this?

One thing that I don't think enough is being made of in respect to the impact of future interest rate rises is the sheer size of the mortgages now and the rapidity of increase in size.

Much is made of the fact that we have historically low interest servicing costs. True enough. But we have historically high sizes of mortgages - and those sizes increased real quick.

I did a quick exercise on the interest.co.nz mortgage calculator.

I took all of the average mortgage figures used above and applied a standard fixed rate of 3.15% for 30 years against all of them. I was interested to see a rough example of how much the increased size of mortgages in the past year has increased the size of payments that people now need to make - BEFORE we even start talking about interest rate rises.

Doing the numbers

So, okay if we look at the 'all' averaged sized mortgage figure for June 2021 of $327,320 (as above) versus the $243,980 averaged sized mortgage in June 2020, the monthly payments on the June 2021-sized mortgage would be $1407, versus $1048 on the June 2020-sized mortgage.

And drilling down: On the June 2021-sized FHB average mortgage, you would be paying $2348 a month, versus $1939 a year ago.

On the June 2021-sized owner-occupier average mortgage, you would be paying $1174 a month, versus $846 a year ago.

And on the June 2021-sized investor average mortgage the payment would be $2009 a month versus $1410.

So what do we make of that?

People have increased their commitments substantially - even as interest rates have been so wonderfully benign.

This is not all about interest costs and serviceability - it's about sheer size of commitment and the kind of exposure to untoward events that provides.

Clearly though, any meaningful rise in interest rates over the next 12 months could cause some real problems.

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40 Comments

by CrispyKahawai | 27th Jul 21, 2:33pm 1627353191

What I would give to have a mortgage of only $327,320...

by Jackson.D | 27th Jul 21, 3:01pm 1627354876

Same, I'm sitting on slightly less than double that.....
Most of my friends at a similar age are in the same boat or considerably worse.

by refactornz | 27th Jul 21, 3:43pm 1627357383

At least it's only 6 figures

by Nzdan | 27th Jul 21, 5:55pm 1627365333

My mortgage is currently half of that. But I make mortgage payments the equivalent of that amount on a 25 year term.

by CWBW | 27th Jul 21, 2:34pm 1627353276

Every uncertainty comes with opportunities. There's no better time to grow the portfolio.

Commitment is on growth.

by Dongleberry | 27th Jul 21, 3:10pm 1627355420

Does mortgage size matter if the tenants are paying it?

by Millennial_Woman | 27th Jul 21, 5:12pm 1627362749

It does if interest costs rise faster than rents.

by WellingtonInvestor | 27th Jul 21, 5:24pm 1627363444

Yes, it could be a disaster. Also what happens when someone can't find someone to rent out a rental? As more and more homes are being built, it is a possibility in the future if supply overtakes demand. Likewise, future healthy homes requirements may make some houses unusable as a rental without a lot of money spending on them. At the moment investors have had it sweet.

by Nzdan | 27th Jul 21, 6:04pm 1627365862

I have commented this on a few occasions. Approx 3k FHB per month take out mortgages and a similar if not more amount of investors. With net migration at a near standstill, we're relying on natural growth to fill the rental demand. That is people born 18 years ago, 54k per annum = 4500 per month.

It might be easy to fill a rental today, but how many of the 3k FHB per month are leaving rentals? Meanwhile how many of the investor purchases are adding to the rental stock?

by WellingtonInvestor | 27th Jul 21, 9:39pm 1627378793

Good points. I think investors are going to rely on migration picking up again.

by Spiceeh | 28th Jul 21, 3:17pm 1627442246

Variants to the rescue of FHB. Investors are going to start feeling the pinch as they discover that not vaccinating the third world fast enough is going to create an ongoing global wave of COVID variant after COVID variant, that could likely take years to die back...if ever. Has anyone noticed that Flu viruses have been gradually getting worse in intensity these past few years? This years was/is a doozy.

by Whatwillhappen | 29th Jul 21, 11:27am 1627514821

Nil side effects this year. Arm only hurt for a day

by brisket | 27th Jul 21, 3:36pm 1627356973

...and this is why any talk about interest rate rises from the Reserve Bank is purest blather. Half a percent would see Newstalk ZB and the Harold leading investors in a march on Parliament... a convoy of black Porsche Carreras steaming from the inner East Auckland down to Wellington, indicators unused the whole way, no doubt...

by Averageman | 27th Jul 21, 6:12pm 1627366326

Rediculious. Investors are taking a risk in abnormal times which have generally all been in their favor. Rates will go back to long term averages. Why should investors tax free debt go round be protected at the expense of everyone else?

by brisket | 27th Jul 21, 8:42pm 1627375352

I’m really, really not saying they *should*. I’m saying they *will*. Property owners are voters. The ‘average Kiwi’, in the mind of the media and politicians, is a proud homeowner… the fact that over half the population now live in rentals is, for now, irrelevant.

by thinktank | 27th Jul 21, 3:52pm 1627357950

Doesn’t mean anything when you’ve got good rental cash flow!

by blobbles | 27th Jul 21, 4:40pm 1627360838

We are really set up for a bust now... the longer this goes on, the worse it's going to be.

Likely we will have to take out a greater than half a million dollar mortgage later in the year. It already gives me a sick feeling in my stomach (even though we will be less than 3x income). I shudder to think about those that are going even larger on less income...

by Carlos67 | 27th Jul 21, 4:54pm 1627361641

Actually the longer this goes on without anything major happening the lower the risk. If house prices go back to normal pre Covid gains, interest rates go up a percent or two it will all come out in the wash a few years down the track. What we have done is setup for a major economic crash if something major comes along right now, but thats just the risk you take, you could get hit by a bus tomorrow because you decided to get out of bed.

by VeryInterested | 28th Jul 21, 8:03am 1627416237

The bull goes up the stairs, the bear goes out the window. Heard this quote on Stansberry Research this morning.

by Lord Dowding | 27th Jul 21, 5:18pm 1627363088

It’s gearing. In a low interest environment this isn’t exactly a surprise.

Ask all the savers how well they’ve done in the last couple of years.

by WellingtonInvestor | 27th Jul 21, 5:20pm 1627363233

Conditions change. You could get nearly 10% in the bank in bonus savings accounts about 12 years ago.

by WellingtonInvestor | 27th Jul 21, 5:19pm 1627363179

These huge mortgages have gotten the nickname 'Mega Mortgages'. I hate to think how some people are going to afford them longer term when interest rates return to more normal levels. Even 6-8% is quite low historically.

by Averageman | 27th Jul 21, 6:13pm 1627366437

Agreed.

by dago | 28th Jul 21, 10:48am 1627426115

If they ever get anywhere near 5% for 1-2 year fixed rates, the country goes down the gurgler.

by Nifty1 | 27th Jul 21, 7:17pm 1627370243

Can we get a break down of Auckland & Wellington FHB mortgages, no doubt these would be eye watering...

by AJ123 | 27th Jul 21, 7:41pm 1627371678

In all fairness I still think there is still a space for property market to move up, just wait for summer and you will see another 10 to 20% increase.

And that is necessary otherwise our economic growth will stop which we don't want. Go team 5 million you can do it with support of current favorable condition just go for it.

by WellingtonInvestor | 27th Jul 21, 9:46pm 1627379163

On average perhaps. But some markets, including rural towns seem to be at a bit of a standstill at the moment with few houses selling and not getting the inflated figures agents think they are worth.

by camnz | 28th Jul 21, 9:04am 1627419851

Depends on the rural town I guess. Locally (Waikato - 1/2 hr out of Hamilton) just last week - house asking $759k got over $900k, another house vendor wanted something with a 7 in front ended up going for over $800k.

by MisterB | 27th Jul 21, 7:52pm 1627372328

The first home buyer figure is more telling than the overall one. The total one will include lots of little top ups to buy cars, decks and house plants. The FHB one is all new… I worry about if they’ve prepared for higher rates and the lifestyle changes that will call for

by Hans Brink | 27th Jul 21, 8:38pm 1627375125

Don't get to despondent, I know several young people who have recently bought their first home. They are very positive about their future. Finding work is easy, something that hasn't always been.

by MisterB | 27th Jul 21, 8:56pm 1627376172

Being concerned is not being despondent. Those young people with mortgages 6-10 times income will find disposable income shrink with even moderate rises

by Notgreedykiwi | 27th Jul 21, 9:43pm 1627378994

Very good article explaining which no one understands. Most people are taking Mortgages for 30 years but none of them plan to pay it for 30 years. They are hedging that their houses will increase substantially in price in few years and that will make them rich. Yes it might increase and make a few investors really rich. But what happens if the prices don't really increase a lot and they end up paying more to the bank than the house is worth? And how many are really saving for their retirement along with paying the mortgage??

by Hans Brink | 27th Jul 21, 10:38pm 1627382281

From what I am hearing is they are buying to have somewhere of their own with no intention of selling. When you look at renting which means living on someone else's property, having a morgage and the freedom of doing your own thing is worth a lot. Most have the intention of paying down debt as much as possible while they are young, some things never change.

by Sluggy | 28th Jul 21, 1:20pm 1627435207

Mortgage and freedom in the same sentence.

If your idea of freedom is being beholden to the bank then sure.

by KH | 28th Jul 21, 4:17pm 1627445845

Mortgages are not fun Sluggy. But paying rent is torture. And not sensible even.

by fender bender | 28th Jul 21, 7:06am 1627412794

How much interest collected each year in NZ goes off shore in profit & expenses to finance head offices around the world? Think of that as interest rates rise too.

If house prices were half the current price, what would that mean for reducing this cash drain. What other ways would this cash benefit NZ, if retained in NZ and put to good use?

Just like a junkie who’s hooked on a few thousand dollars a week habit. NZ is hooked on a few billion a year habit, and who are the pushers, dealers?

by SimonRo | 28th Jul 21, 11:32am 1627428757

Its not just the pushers and dealers that concern me -
Actually we are all standing around at a party and most of us are a little high on something we tried a few hours back. Some of us the high has worn off and are thinking "nope not gonna risk that again".

But the party is being led by DJs Adrian Orr and Grant Robertson, and we are cheering for the ones still snorting and popping pills for doing their part to keep the crazy atmosphere going, get the music spinning louder and louder *borrow*BORROW*BORRROW**!!! The party atmosphere is great for everyone or so they say and if we stop the music everyone will suffer.

by VeryInterested | 28th Jul 21, 7:58am 1627415916

Average size of mortgages….. but how many average size mortgages are held against each property? 2,3,4,5? Is it just the size of the mortgage that’s going up, or the number of mortgages held against a property that’s increasing too. Our own mortgage was split between 2 fixed rates and a variable. Are people now increasing the amount borrowed and splitting it between 4 or 5 mortgages?

by Jackson.D | 28th Jul 21, 9:05am 1627419917

Good point, we are the same with two mortgages. Although the percentage increases are still significant, showing how much extra people are borrowing.

by SimonRo | 28th Jul 21, 11:26am 1627428369

I certainly hope the statistics have taken mortgage splits into account, that is certainly a common setup.

I would really like to see the absolute numbers of mortgages in brackets of multiples of $100K, and maybe with added knowledge of how long those have been in place. There is something to be said for knowing how many people out there are the special ones that upgraded or went big in the last year?