Well, the great journey into the unknown of rising mortgage interest rates - for really the first time since the mid-2000s - is now about one-and-a-half years in.
How are we doing so far, and what are some of the visible trends?
It will come as no surprise to anybody who's had to re-fix their mortgage that there have been some smelling-salt-requiring hikes in mortgage payments going on.
The Reserve Bank's latest residential mortgage loan reconciliation figures for the December 2022 quarter showed that interest charged in the quarter was some $3.549 billion, the highest figure since the RBNZ started this data series in 2014. The latest figure compares with the record low $2.323 billion interest charged in the September 2021 quarter.
Those latest stats show few visible signs of homeowner stress as yet. Repayment deficiencies, at a bit above $200 million in the December quarter, were not appreciably different to what we've seen since mid-2020, while excess payments of over $4.2 billion are in line with (if not even a bit stronger) than the trends over the past several years.
Will the situation change though?
To go back a bit, the low point in interest rates can pretty much be taken as June 2021. Wholesale interest rates began heading skyward in July 2021 as there was grim confirmation that inflation was starting to get red hot.
Enter the RBNZ and rate hikes.
A point often made in mid-2021 was that the RBNZ would get good 'bang for its buck' in this hiking cycle. Put simply, homeowners would be affected by the interest rate rises more quickly this time than has been the case sometimes in the past - notably in the mid 2000s.
That's because most mortgage holders had as of 2021 gone pretty 'short' with their fixed terms, presumably not anticipating rising rates.
This meant that once interest rates went up many mortgage customers would be faced with soon having to refix - at a higher rate - and this would help the RBNZ more quickly achieve its job of slowing things down and taking the steam out of spending and the economy as a whole. And taking the steam out of inflation.
If we look at the RBNZ's detailed data looking at the time to next refixing, we can get a good snapshot of how things were when we started to see interest rates move up in mid-2021.
For the purposes of this stroll through the numbers, I'm using a starting point of June 2021, which as said above is pretty much the low point for the previous interest rate cycle. And then I'm comparing that with December 2021 and December 2022 - the latest figures available.
As of June 2021 just under 70% of the whole outstanding mortgage stock - then totalling $318.4 billion - was either on floating rates or due to be refixed in up to a year's time.
But by December 2021 the percentage of floating and due to be refixed in up to a year's time mortgage money had reduced to 63%.
And by December 2022 this was down further to a touch under 60%.
So, the profile of the outstanding mortgage book is gradually changing as homeowners face higher rates and as they make changes, particularly to how long they fix for.
Looking specifically just at fixed mortgages and over a shorter (three-month) timeframe, we can see that in June 2021 over 17% ($48.5 billion) of fixed rate mortgage monies were due to be refixed within the next quarter.
By December 2021 that percentage had fallen to a little over 13.5% and by December 2022 just over 11%, representing nearly $34.5 billion worth of mortgages.
So, we as a mortgage paying public, are going 'longer' to avoid the risk of being hit maybe by higher rates in future.
In June 2021 just under 25% (nearly $69 billion worth) of the fixed-rate mortgage stock ($278.6 billion) was fixed for terms in excess of a year. That's all.
However, as at December 2022 nearly 45% ($139.5 billion worth) of the fixed-rate mortgage stock was fixed for longer than a year.
That's quite a change. So the homeowners are moving with the times and the conditions when it comes to managing their interest rate risk and what they can afford.
Is the RBNZ losing bang for its buck?
Does this mean the RBNZ is now losing that 'bang for the buck' it had at the start of the interest rate hiking cycle?
Well, not really. While a lot of people have already felt significant impact from rate rises, plenty more people are still facing future hikes.
As mentioned above, as at December 2022 there was nearly $34.5 billion worth of fixed rate mortgages due to be reset in the first quarter of this year. That's still a very significant amount, with potentially a significant impact.
Let's highlight a specific example looking at the particularly popular two-year fixed rates.
Anybody who took up a two-year fixed rate mortgage in February 2021 is now refixing, or indeed already has refixed.
A look at the RBNZ's monthly mortgage figures shows us that in February 2021 there was a bumper $7.6 billion worth of mortgages taken on. This amount was split between some 23,852 mortgages, giving an average sized mortgage of around $320,000.
Working on the idea that somewhere between about a fifth and a sixth of those mortgages (based on averages at the time) will have been fixed for two years, we can deduce that possibly something like 4000 to 4500 of those mortgages were two year ones that are now resetting or just have been reset. That's a small number in the context of the overall population, but a reasonable crowd if you were to get them all together!
The average two-year (special) rate as of February 2021 was Just 2.65%. Happy days. Now it is 6.63%. So, using the friendly interest.co.nz calculator gets us this outcome when we compare a $320,000 mortgage fixed for two years in February 2021 with what a two-year rate will be costing now:
The monthly payments are $761 (59%!) higher, representing an annual increase of over $9000. Total payments now would be $24,600 a year, which runs to $473 a week.
That's what our 4000 to 4500 mortgage holders are facing.
Now I guess human nature at this point is to say, well, that's a one-off shock. But of course the higher payments are ongoing till such time as rates start coming down again and the point is that some people might have money put aside at the time they start higher payments, but this extra saving is gradually sapped as time goes by. So, it could become more of a struggle.
Repeated shocks
Another thing to consider is, I talk about a 'one-off-shock' of higher rates. But of course for some people the shocks are repeating - if they have fixed for shorter terms.
For example, If you took at a one-year fixed mortgage in February 2021, you would have needed to refix in February 2022. Interest rate rises were already well under way and the average one-year rate had risen from 2.41% in February 2021 to 3.61% in February 2022. Using the same information as above, IE a $320,000 mortgage, would see payments of $1249 a month in February 2021 and $1457 a month at the higher rate prevailing in February 2022.
Monthly payments would therefore be over $200 more. Bit of a blow to the finances. Doable though.
But wait. There's more. These one-year fixed people are now 'going around' again. And assuming they refix for another year they now face a rate in the region of 6.48% (current one-year market average) and monthly payments of $2018 - a further increase of over $550 on what was being paid as of February last year. Ouch.
Anyway, that's where we are at the moment. As I say, the RBNZ figures suggest there's no obvious rise in stress for mortgage holders - yet. But as more and more people are put on higher rates, and they have to keep meeting the new higher payments month by month, well we shall have to wait and see.
It's hard to imagine there won't be a significant slowdown in spending this year - of which there are already signs. But then from the RBNZ's perspective, I believe that is the point...
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37 Comments
"Homeowners move with the moving mortgage landscape"
Kind of.
Property owners of all kinds are being cajoled into keeping Risk On when, of all times in the last 25 odd years, now is not the time to have it. De-risking should be the name of the game at the moment, to make sure that the future doesn't become a nightmare for leveraged asset owners. And 'experts' writing that "they wouldn't touch 5-Years Fixed with a bargepole" etc does nothing to encourage them to lower Risk for longer. Who wants to be the bunny that fixed for 5 years when it was 'so obvious' that rates had topped out? And that's the problem - they haven't, and those same bunnies are at risk of being skinned alive.
bw, I agree that it's a good time to reduce risk, but I don't agree with your view, that this can only be achieved via fixing one's mortgage for the long term, and I definitely don't agree that "the bunnies" will be the one's who have fixed short, until 2024. I believe that in 2024, today's 5 year rates will look very expensive.
What I think doesn't actually matter. But what I do take notice of is the RBNZ; The Fed and the BoE and the ECB and the RBA and The Bank of Canada and The Bank of India and..... They have told us all what's going to happen. Believe it or not, that's up to each of us. And if they follow through, as they've told us they will, then 6.4% for 5-years fixed is soon going to look cheap.
how do you know they haven't topped out?
IMO it's all a guessing game when it comes to short fixed term rates but looking at past interest rate cycles it's hard to see a period where the OCR has accelerated so hard in such a short time.
Given that property valuations have inflated (as expected) more and more over the decades, debitors are much much more leveraged and the effects of an OCR hike will be more significant.
I have no doubts the OCR will be hiked a bit more but as this is happening all around the globe, inflation and in consequence interest rates are to come down sooner or later and that's likely less than a year away.
interesting analysis. though the calculation might need some tweaking.
for someone take on a loan 01/02/2021 for, say, 320k@2.65% loan, if they refix on 01/02/2023, the principal has reduced to around 305000.
for some, this reduction of principal can be a useful buffer on a higher interest rates if they refix on a 30 year term instead of 28. so the monthly payment could be 1954/month, not the 2050 as showed in your calculation.
It's a bad illustration to start with, though based on the average loan taken out being $320k, so I understand why it was used.
In reality, anyone with only a $320k mortgage probably has an average NZ home they have owned for over 10 years so should be near or past the interest vs principle tipping point of their table loan - so should be trying to pay it off even faster... in less than 10 years... rather than extend it out to 30 years to reduce their repayments.
https://www.interest.co.nz/calculators/full-function-mortgage-calculator
Agreed, a house bought in that last 2-3 years would have cost nationally about 700K so even with a 20% deposit loan is $560K and increased cost of even 3.5% is $19600 PA - $1633 a month - ouch.I see an increasing level of reduced spending on non essentials with consequent unemployment and liquidations, all gaining momentum just in time for elections - Oh dear Grant ORR will someone share the blame and fall on his sword.
What was the OCR just 15 years ago? 8.25% wasn't it? And what was the CPI, probably about 4%. And mortgage rates were in the teens in places.
Almost the reverse of what we have today, and to expect what we have today that to continue is fanciful.
To expect Inflation to 'do as it's told' and fall back below the OCR without some sort of drastic action is just as fanciful. If the RBNZ could make one bold move, it would be to put an end to this uncertainty of OCR creep; get a substantial amount of the projected increase out of the way - hard and fast. And just as likely the CPI would respond just the same - hard and fast in its decline. The RBNZ can then put a lid on the OCR/CPI ratio with a positive interest rate number and follow the CPI back down instead of chasing it up, as current rises are undoubtedly doing.
The sooner we get this mess corrected, the sooner and less costly it will be to us all.
I kind of agree and disagree.
I agree that going harder now would be a big step in taming inflation. However, it would mean a severe recession and unemployment almost certainly rising to more than 6% by early 2024.
The RBNZ have employment and financial stability in their mandate, as well as inflation.
And by Financial Stability, read that as Keeping Property/Asset Prices Up? That's what it boils down to in a debt soaked society backing speculative asset prices and not productivity. The RBA is obviously in the same boat - as they all are to some degree. But how is that going to tame runaway Inflation? If anything, pandering to asset price stability is just going to make what's coming worse. I'll suggest that's why we have been so strongly warned of what the course of action will be by the Central Banks. They know that pain is coming, but it will be far worse unless they act now.
I guess we are all about to see, and the trick is to be a survivor when it's all over - whatever happens. That's what DeRisking is really all about.
That's the rub, isn't it.
And we've let it go on for so long that you now can't separate out the speculators from the owner occupiers as there's been enough Kiwis forced to pay through the nose for houses that were worth half as much ten years ago. Jack up rates, and you run the risk of families getting thrown out of home and investors selling down and making the problem worse.
I feel like tax settings are the best option here but the government seems to have little interest in tax reform unless it is a way to extract more money from people, and even then they've figured out they can do that by literally not doing anything to the tax system at all.
Actually, higher interest rates tend towards a more stable financial system. The happy-go-lucky near-zero rates of the last few years have been an absolute disaster from a stability perspective, as we're about to see. The ability for banks to simply create money via debt-offset (instead of actually having to invest their own $$) is also not helpful.
Meanwhile, I know an FHB selling due to not being able to afford their refix.
According to them:
1. It's Orr's fault for raising the interest rates, and not them taking on debt they couldn't afford (by pretending the massive amount of O/T they did for the 3 months prior to application was their normal income, oh and the in-laws paid the deposit too. If they hadn't done those 2 things, I think they'd have been able to survive much higher interest rate rises - I wonder how many other's are in that boat?).
2. Everyone else should accept higher inflation because then rates won't go too high so they can keep their house. That's right, you and I should be paying more for our groceries etc. so they can keep an asset they can't afford.
I watch with interest.
I say this with respect.
RBNZ can't have their cake and eat it too HM, not this time anyway.
Would you rather a short and sharp deep recession, or a prolonged death by a 1000 cuts scenario?
We need to get on with it, either we do it or inflation will do it for us. Slowly.
KO projects are already pretty busy, they won’t be able to ramp them up much because of their debt levels. The KO model is also very reliant on the strength of the private development market. If that collapses they would have to incur much more debt…
It would be total carnage in residential construction if the OCR went to 6% or higher by mid year. The sector is already in big trouble.
They don’t really have another option.
interest only speculators will get slaughtered
as will those that borrowed too much
its a long way down until the numbers stack up
i have watched several videos on the property forum over a few years and not one scenario has made a positive financial return on a cash basis
show me the money tony alexander
madness
Exactly. I believe:
-the persistence of inflation is constantly underestimated, and
-we can and should destroy the housing market without causing mass unemployment.
I propose a differential OCR. Low rates for business lending and new properties, high rates for specuvestors. Kill capital gains on unimproved property forever while encouraging more housing and productive business. A man can dream…
bw: What was the OCR just 15 years ago? 8.25% wasn't it? And what was the CPI, probably about 4%
And what was household debt to income ratio 15 years ago…? Much higher! So how are households going to pay by for the much higher debt at much higher interest rates in 2023…? By cutting down on spending! What does that do to businesses…? Some close down, some just let go of some staff, so unemployment rises… So how are unemployed going to pay for their big debt at higher interest rates… Finally, what do central banks do when the proverbial hits the fan…? They reduce their interest rates, fast and sharply! Think about it, bw
"ANZ Bank’s head of institutional banking Mark Whelan says rising interest rates will boost earnings for the bank as large corporations switch from debt capital markets to bank loans, helping to offset weaker home lending. Mr Whelan said a higher interest rate environment was expected to underpin an increase in new business loans over the next year. (AFR)"
And what do we think those businesses, that have to pay a higher % rate, are going to do to the price of their end products? Drop them?
And if lenders are repricing debt to businesses higher, what do we think they'll do for retail property loans that are granted? Drop them?
But of course, that's just an opinion of one of the Aussie banks, who just happen to be our largest one, as well.
It will come as no surprise to anybody who's had to re-fix their mortgage that there have been some smelling-salt-requiring hikes in mortgage payments going on.
Let's not get too carried away here, we are still discussing single digit interest rates. Interest rates have historically been far higher than they are now as recently as 2007 as I recall. It was the low rates period that was unusual:
True, but the higher mortgage required nowadays offsets the lower interest rate.
A $500,000 mortgage at 10.5% over 30 years is a repayment of roughly $4500/month, while a $800,000 mortgage at 6.5% over 30 years is about $5000/month.
While the interest paid on the 10.5% loan will be slightly more than the 6.5% at the end, it would have a lower overall total due to the lower initial mortgage needed.
The problem is that when people bought at those unusually low rates in 2020/2021, they were paying a lot more for the property, but the true cost was hidden as the repayments comprised a bigger chunk of capital.
Now when the rates go up, the jump in interest being added to the mortgage is significantly higher, whilst at the same time, the chunk being taken off the capital is shrinking.
I do not think that when banks stress-tested peoples ability to service the repayments when interest rates were in the 3%'s, they said to the buyers, "if interest rates go to 6% you'll be paying $1000 more per month in interest, so you'll need to cancel your streaming services, only have showers once-every-other-day, have home made instant coffee, cut out the expensive but healthy food, no more takeouts, no more dining out, have a garage sale, ask for a pay rise and change jobs if you can't get one, take in a roommate, sell your car/ute/suv and get a bicycle, ..."
The change in lifestyle to find an extra $1000 / month is significant for a lot of people.
Great post.
On the extra $1000 per month - many (far from all of course) have had very significant salary increases over the past 1-2 years. That will mitigate that significant rise in mortgage outgoings. It will mean for a reasonable number of households a net increase in outgoings of perhaps $300-400 (accounting for increases in prices of groceries etc). A significant increase but not huge.
I agree. The job market over the last couple of years has certainly allowed a greater portion of our employed population to get a significant jump in their earnings. It would be interesting to know, for those that asked for pay rises or changed jobs to get better pay, how much that decision was influenced by having a mortgage in a rising interest rate economy. I know it did for me. Fortunately my employer was OK with the increase I asked for.
Where is the real risk? Clearly we are not to be trusted with all the information. Just what we can glean from various sources and media reports. But we do know from March 2020- December 2021. 30 billion was loaned to 59k first home buyers. Gives an average of just over 500k per household which in most cases would be a couple.
So roughly 120k people that are having their spending power curtailed by the extra 3% interest 15k per year. That is going to be taking up 12k each of their pretax income every year.
Or that couple need to give up 300 cafe brunches each per year to be back to break even.
Considering the rates difference between 6 months and 5 years is < 0.5% for most banks, and that break fees for short-term fixed loans will be lower, even if the interest rate is slightly higher, I would consider fixing at 6 months to see if this rate inversion continues, and if the longer term rates drop considerably lower, pay the break fee to switch.
What is considerably lower? < 5% for 5-year. Will it happen in 6 months? Who knows. I certainly wouldn't trust anyone that says they did. You'd probably get a better answer dropping a quarter into a Zoltan.
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