BNZ is increasing the interest rate it uses to stress test mortgage applicants' ability to service their loans by 50 basis points.
"Effective today [Thursday May 12] the servicing rate has changed to 7.25%, it was 6.75%," a BNZ spokesman told interest.co.nz.
BNZ sometimes calls this the AIR rate, or Applied Interest Rate.
Mortgage serviceability is basically a calculation of whether a borrower can afford loan repayments after other expenses and income are taken into account. Increasing the AIR, or serviceability, rate may reduce the amount of money a bank is prepared to lend to a potential borrower.
The BNZ increase comes after CEO Dan Huggins told interest.co.nz last week that this mortgage serviceability rate was under review and would likely be increased as soon as this week.
That was after both ANZ and ASB increased their mortgage serviceability rates last week against the backdrop of a rising interest rate environment. ANZ increased its one to 7.15% from 6.70%, and ASB increased to 7.35% from 6.85%.
And this week Kiwibank has increased its mortgage serviceability rate to 7%. A Kiwibank spokeswoman says test rates "give us the ability to mitigate the risk that potential increases may have on the borrower’s ability to repay their loan."
On Monday Westpac NZ CEO Catherine McGrath told interest.co.nz the main relevant test rate her bank uses is adding 2.50% to its retail rates, and making sure customers are able to service that.
Westpac NZ's current carded, or advertised, two-year rate - typically the most popular borrowing term - is 5.19% for borrowers with at least 20% equity. Adding 2.50%, takes it to 7.69%. (See all mortgage rates here).
Fixed mortgage rates
Select chart tabs
13 Comments
Unless swap rates slow down their rapid ascent (which the current financial market instability may achieve....or it may not if risk begins to be accurately determined....i.e. there is more risk of default so I need more return for my invested dollars), then test rates could start knocking on the 8-10% range very soon.
The 1 year fixed mortgage rate is back up to where it was in April 2018.
So house prices should be where they were in 2018.
Give or take a little for inflation/sentiment/price stickiness.
The 2 to 5 year fixed mortgage rates are literally "off the chart", in that they are now higher than at any other time shown in the charts above.
Imagine a point now Fitzgerald where markets stop believing the Fed and their narrative around risk/yields. Markets can see that the risk of debt default is actually high so no matter what they do, swap rates don't come down. They demand higher and higher returns on invested capital to offset the risk they see in the markets.
And perhaps unless the Fed lifts the official cash rate at or above the rate of inflation, debt markets just continue to raise the required return on the debt. We could have a recession, but all that does is increase the risk of debt default, so swaps go even higher....(its a possiblity).
Really interesting times we live in from a finance/econ perspective.
‘Debt markets just continue to raise the required return’…
It doesn’t work that way. The market can’t simply demand a rate and get it. If you understand the mechanics of it, the implication of what you say is that market has to lose today to express their view of higher returns in the future… it just doesn’t work that way. The debt market is a sophisticated market and the margin of error is far less than equities
Let's do a little math for a hypothetical experiment. FHB purchasing a 3 bedroom ex state house in Lower Hutt in Naenae or something like that. At current prices, let's say 700k. So a 20% down mortgage would be a loan of 560k. So 560k * 0.0725 is 40.6k per annum.
Let's juice this with the best possible FHB. A 28 year old man caring for a SAHM and a one year old with a primary job of Software Development Lead earning 140k, 4% kiwisaver and a student loan of 15k. Take home after tax, student loan, kiwisaver etc. Gross pay of 5,369, minus 214.69 kiwisaver at 4%, student loan of 546.12, tax of 1499.48 per fortnight. Net pay of 3109.48. This is an absolutely exceptional case for income and lifestyle which very few younger people enjoy but is our best case FHB.
Now that requires 50% of the income of a top earning FHB to merely cover the INTEREST at the stress test level, not principal. The utter delusion of anyone who thought these prices were justified.
The real question is, how did all these Boomers who earn far less than this (let's say 70-120k) afford these insane mortgages for 1.5m 4 bedroom houses? How many leveraged up to the eye balls against equity in their properties or shares to buy more properties to either rent or sit on for piss poor sub 3% yield?
Really paints a terrifying picture of what's to come. Our (FHBs) mortgage is more than twice that size, but thankfully we locked in some decent 3, 4, and mostly 5 year rates when we bought mid last year. Our combined income is also more than 3x that, but what if we want kids? It's incredible that even I am stressed about this when I'm probably earning more than 99.9% of NZers.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.