A surge in non-performing mortgage loans is a reminder that even though interest rates are now falling, this is not necessarily going to lift the economy as quickly as we would hope

The sudden sharp rise in non-performing residential mortgage loans figures during January was, for me, an unpleasant surprise.

The Reserve Bank's loans by asset quality figures showed that in January, non-performing housing loans rose by $165 million to $2.328 billion.

That's a 7.6% rise in a month, which is a lot. The $165 million figure was the biggest monthly rise in non-performing loans since June 2020 immediately after the big Covid lockdown.

Separate data from credit bureau Centrix has confirmed a recent spike in mortgage loan stress. 

The reason the $165 million rise in the RBNZ-reported figures was so surprising for me was that in the whole of the previous five months, the non-performing loans total had increased by just $115 million. It appeared that the 'crunch' we saw after interest rates started climbing steeply in the 2021-22 period may have been easing. But seemingly not.

The other reason the latest monthly mortgage figures were a surprise stems from the fact that since August of 2024 the RBNZ has been reducing the Official Cash Rate (OCR), down from 5.5% to 3.75% as of now.

Banks started reducing their mortgage rates before the OCR was even cut and popular fixed rates have been reduced by anything up to 200 basis points from the peak levels seen towards the end of 2023. The interest rate cavalry is arriving. Relief is on the way.

So how can we now be apparently experiencing more stress on the mortgage front line?

Well, I concur with those who have speculated that the new spike in the stressed loans figures was due to the deteriorating labour market position. It seems to fit as an explanation.

One of the saving graces of the recent OCR hiking cycle was that we went into it with incredibly low unemployment - just 3.2%. A full jobs market means everyone's working - and they can service mortgage debt.

However, by December 2023 the unemployment was up to 4.0% - and then by the end of December 2024 it had moved swiftly up to 5.1%. In more personal terms that move up from 4.0% to 5.1% last year represented 33,000 people losing their jobs. It's a lot. If we work on the figure quoted by the RBNZ that about a third of Kiwis have a mortgage that would mean 11,000 of those people had mortgages. It must have an impact.

For any mortgage holder it's bad news if interest rates go up, and it's even worse news if house prices go down, driving those with a mortgage into negative equity. Depressing as that may be, however, it's not catastrophic as long as the mortgage holder can service the debt.

But lose your job...and that's a whole different story. Okay, if mortgage payments can't be kept up with then there is the option of selling the house. But if the house is in negative equity that's a real pickle. And if sufficient people are forced to sell up this puts downward pressure on house prices, making the whole problem worse.

So, we may have moved on from a situation where people were struggling to meet mortgage payments because of the high interest rates - to one where some can't meet payments because they don't have jobs.

The RBNZ is forecasting unemployment will peak at 5.2% in the March quarter we are now in. But it is also forecasting that unemployment will come down only gradually, to 4.9% by the end of this year and to 4.5% by December 2026.

Any 'upside' surprises with those figures may not portend well. However, there are some reasonably hopeful signs coming from the monthly Stats NZ Employment Indicators that the jobs market is thawing. We will be watching this space.

From the beginning of the OCR hiking cycle in late 2021 I have been surprised at how well those with mortgages have managed to cope with the large rises in payments seen.

Remember, the potential difficulty for people keeping up with rising mortgage payments was exacerbated by the extraordinary 40%-plus surge in house prices during the pandemic. It meant that anybody buying at the top of the market in the 2021-22 period was faced with much bigger mortgages than they would have taken on previously.

And they were able to take on these mortgages because of historically low interest rates. But once the rates went up, well, trouble...

I had a quick look at some selected examples of past interest rates taken from the monthly average figures for new 'special' rates compiled by the RBNZ. 

I've used two-year rates for convenience, though I appreciate that in the very recent past much shorter terms have been in vogue. But the reason I've chosen two years as the example is because as at March 2025 the two year term is currently offering the lowest rate in the market.

Anyway...

In March 2021 the average two-year 'special' rate was just 2.6%.

By March 2023 it had shot up to 6.5%.

As of early March 2025, the best current 'special' for two years is 4.99%.

The current average-sized new mortgage, based on monthly RBNZ figures, is about $360,000.

So, I jumped on to the helpful interest.co.nz calculator and crunched some numbers.

If we used a time machine and went back to March 2021 and took out a $360,000 mortgage for a 30-year term, we would have been paying $1441 a month.

The same-sized mortgage, for the same term, would as of March 2023, at the 6.5% rate, be costing $2275 a month. 

And now? At the current 4.99% rate the cost would be $1930 a month.

I appreciate that these examples are not exactly apples-with-apples, but they do provide some indication of just how much of a difference the movements in rates have had for those with mortgages. And they help to illustrate two things: 

Firstly, the rate rises really did cost a hell of a lot. The rise in payments between the first example from March 2021 and the second example from March 2023 is 58%.

But secondly, while rates are now coming down, we are not going 'back'. Rates are not going down to the levels they were at before they started rising in the second half of 2021.

Yes, the 4.99% current two-year example is over $300 a month cheaper than the March 2023 example - but it's still almost $500 a month more than the March 2021 example. 

People are getting relief as rates come down - but those who had mortgages going back to 2021 and earlier will still be paying more than they were.

So, how far down might rates go? 

Well, the RBNZ has virtually promised 25 basis point cuts to the OCR at each of the next two reviews on April 9 and May 28. That would take the OCR to 3.25%.

The financial markets are fully pricing in another cut by the end of the year - so, an OCR of 3% by year end.

(Note that as I was writing this the news of Reserve Bank Governor Adrian Orr's resignation was breaking. It's early days yet to speculate as to whether his leaving will make any difference to any timing on rate moves. Off the top of my head, I wouldn't have thought so.)

Banks are already indicating rates might not go much lower - but I think they would say that. I wish I had a dollar for every 'interest rates have hit the bottom' headline I saw probably from about 2017 to 2021. 

It's only a guess, but I reckon we might yet see rates as low as say 4.25% towards the end of this year.

Interestingly though, if we apply the above stated $360,000 mortgage example with a 4.25% rate that would be $1771 a month - so, STILL more than $300 a month higher than if the March 2021 rate was applying.

What we've got then is the fact that rates are still much higher than they were and likely to remain that way. And this is coupled, crucially, with the fact that the size of mortgages got much bigger.

In 2015 the average mortgage size nationally was $193,000. By 2021 this had risen to $345,000 - that's a 79% rise. At the time it was feasible because interest rates were still dropping. Much bigger mortgages became 'serviceable'. But it was a trap.

I do therefore wonder if there's more people out there than might be generally realised who want/need to rebalance their mortgage situations. 

There may just simply be some fatigue now at how long some people have had to keep taking in belts in order to meet mortgage payments. And some people might want to break the cycle.

So, what should people do? Well, unless mortgage rates go a lot lower from here - and that's probably not going to happen unless there's some kind of global meltdown (although, let's face it that's not the most unlikely scenario given the current global situation) -  then selling up and getting cheaper may be the best option for some.

Of course that might not be an option for those who bought at the top of the market in 2021-22 and probably got the cheapest thing they could at the time - which will have subsequently gone down in value. It would be frustrating.

All of this makes me wonder two things: Will the numbers of people struggling to meet mortgage payments stay higher for longer than has been expected? And will we continue to see large numbers of houses coming on the market, regardless of how much oversupply there may be? Auckland's biggest real estate firm Barfoot & Thompson reported having its most properties for sale in 14 years as at the end of February. 

The major bank economists seem to have settled on the idea of a 6%-7% rise in house prices this year, with this mostly happening in the second half of the year. There is agreement among them that an uplift will be unlikely till the overhang of unsold houses on the market is removed. 

I was intrigued that the RBNZ, having increased its estimate of likely house price rises this year to over 7% as recently as in its November Monetary Policy Statement had then virtually halved that estimate - without any comment - to just 3.8% in the February MPS. 

It was a pretty interesting thing to do in such a short space of time.

All in all then, there's plenty of things to watch out for.

What seems clear enough so far is that we can't just simply assume that because interest rates are now going down, everything in the economy will just 'come right'. 

*This article was first published in our email for paying subscribers first thing Thursday morning. See here for more details and how to subscribe.