More than 24,000 households are likely facing a significant level of mortgage stress, with their mortgage payments increasing by an average of almost $250 a week due to higher interest rates.
While anyone with a mortgage will have been affected by the higher prevailing interest costs of the last few years, the most affected will be those who took out their mortgage between May 2020 and August 2021, when mortgage interest rates dropped below 3%.
Over that period the average of the two year fixed rates offered by the main banks ranged from 2.52% to 2.88%.
That also covers the period from 1 May 2020 to 1 March 2021 when the Reserve Bank removed loan-to-value ratio (LVR) restrictions on mortgage lending.
This was a period of very easy money, and according to the Reserve Bank, 397,564 mortgages were approved between May 2020 and August 2021.
While it’s likely that almost all of these people will have faced significantly increased mortgage payments when they re-fixed their mortgages, those who have faced the biggest challenge will likely be people who purchased their property with a low equity loan with less than a 20% deposit.
According to Reserve Bank figures, 24,244 low equity mortgages were approved between May 2020 and August 2021, with an average value of $490,761.
Of the 24,244 low equity mortgages approved during that period, almost two thirds (65.4%) were to first home buyers.
The average two year fixed rate at the mid-point of that period was 2.58%. On the average mortgage size of $490,761, that would give average mortgage payments of $526 a week.
Increasing the average mortgage rate to 6%, the average two year fixed rate in August this year, would lift the weekly mortgage payments to $769 a week. That means many of those borrowers could be looking at having to find an extra $242 a week to service their mortgage.
Offsetting that, wage growth has also been quite strong over this period, according to Statistics NZ, with median earnings for a couple from wages and salaries rising from $2136 a week in June 2020 to $2540 a week in June 2023, up by $404 a week (pre-tax).
Once tax was taken out of that its likely that most of the growth in earnings would have been eaten up by the higher mortgage payments, leaving higher living costs, covering everything from rates, insurance, food, transport and clothing, to property maintenance and other household expenses, to be squeezed out of the remaining income.
On top of that, the homes of many of those borrowers could be worth less now than they were when they purchased them, potentially pushing them into negative equity.
Between May 2020 and August 2021 the Real Estate Institute of New Zealand’s lower quartile selling price ranged from $446,000 to $619,000. In August this year it was just $577,500, which is well below where it was from March 2021 onwards.
The REINZ’s median price has plotted a similar course, ranging from $620,000 in May 2020 to $850,000 in August 2021. It was only $765,000 in August this year.
Those figures suggest perhaps around of the third of the low equity borrowers during the period when mortgage rates were below 3% could have seen the value of their homes decline from what they were worth when they purchased them.
Although the situation and degree of difficulty individual borrowers are in will vary, it is likely most of the 24,244 low equity borrowers who took out mortgages while interest rates were below 3% are now facing considerable financial stress.
And their numbers may even be higher than that, because the rush of low equity mortgage lending continued for another four months after interest rates began rising above 3%, taking the total number of low equity borrowers who are most at risk to just under 29,000.
And of course that’s almost 29,000 households, not just individuals, who are likely finding things very hard going at the moment.
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71 Comments
160 billion of mortgage debt was fixed at 6 month or less duration as at July 2024. So already on high rates. Likely to be offered at rates 0.5 - 1% lower at next refix opportunity. For the hypothetical 490k average. That's a cashflow boost of 50 - 100 per week. They just have to keep their job.
15 - 30 million a week of spending power very soon returning into the national economy should help with that.
It's still much higher repayment for people who got big mortgages at 2.5% when prices peaked in 2021. You have to consider the ones struggling are not your average mortgage value people, it's the 700k+ mortgage holders. For them, even if fixed rates drop to 4.5%, weekly repayments are still ~$175 higher than they were when they bought their house at 2.5%
You are forgetting the other part of the equation. Earnings for the median couple from wages and salaries have risen $404 per week. Right now that increased income is going to mortgage servicing in a lot of circumstances. But as interest rates fall it becomes free cashflow or available to service more debt for a better property.
Who's fault is that you get a mortgage at 2.5% borrow as much as you can and assume that mortgages won't go up. Its basic math, if you borrow at 2.5% and interest goes up to 5% your interest repayments double. Isn't that the point of capitalism dumb ass decisions get punished. I get it there is a lot of pressure to buy a house, it seemed if you don't buy now then it would only get harder. But if society simply bails them out every time, then there really is no consequence for making stupid decisions, then we will only get more stupid decisions and house prices will continue to rise to even more ridiculous levels until no one can own a house.
I really don't want anybody to suffer, however it seems to me that's the only way for people to actually learn.
It's not the same if you own or rent. The banks aren't screaming bloody murder if their money-rent payment is a day past due, nor are they threatening eviction if the mortgagee is 14 days late - instead it's extend extend extend.
It reminds me of Jesus' tale of the wicked servant - forgiven a huge debt (over $100M) but then throws his own debtor in jail for .50c! It's the same here - I still remember receiving a text from our landlord about rent being due yesterday (an event we'd notified in advance would be paid the following day) - all while they hadn't changed their mail address and we could see they were months behind in their mortgage payments!
So no, not the same at all.
Great story. Gave me a chuckle.
I remember earlier this year when we rolled over onto a higher rate, we remained on the same fortnightly repayment. The bank had just adjusted our term so that the reduced principal offset the increase in interest. No discussion if we needed it. No permissions granted. They just altered the term. I was shocked they could do that.
The fact that they where months behind in there mortgage is probably why they where on your case so fast. As a landlord that doesn't rely on my tenants to pay my mortgage, I really don't care if my tenants are late paying the rent as long as they don't start lying about it.
It's not hard to imagine the majority of these 24,000 are those that followed the advice to buy now rather than wait and build bigger interest earning deposits on cheaper houses.
Had they waited, they'd be rewarded with extra fire power (wriggle room) in troubled times.
The term deposit holder is actually the one pretending they are making money... because the other side of the story is that money is becoming more and more worthless each year. The only way to stem that guaranteed loss each year is to buy a real asset like a house.
The person who is sitting on a house that is worth less in real terms also has a mortgage that is worth less in real terms. The people converting the 20% loss on property into a 40% real loss are forgetting that the person who lent to the bank is the one incurring that extra 20% loss, not the homeowner with a mortgage.
Well property has nearly always appeared overvalued due to money supply always increasing much faster than housing supply.
2020/2021 was an exceptional year of excessive growth which has now reversed, the underlying story hasn't changed. Anchoring on a massive spike in prices to quote poor performance is only the reality for a very small percentage of buyers. The same methodology was used to undermine golds performance after it's huge 1980 spike in prices and it's huge 2011 spike.
Lots of investments have done worse since then by the way including commodities, many equity sectors (other than tech), construction, retail, hospitality, tourism etc..
In the longer term, those who own property are almost invariably better off.
As an investment, property holds the popular middle ground....... The sharemarket is too risky for many people. Bank term deposits are safe/secure but get you nowhere in the long term. (The latter are hardly an investment - more a glorified savings account with taxable interest.)
TTP
"In the longer term, those who own property are almost invariably better off."
Is someone going to tell Elon Musk?
On a statistical note - the mega-rich tend to have but tiny fraction of their wealth in property. And on a more modest rich level - say the top 5% - do likewise.
And on a 'truism note' - what you've just said is akin to saying 'richer people get richer', or 'rich people own houses'. Poor people seldom own anything much at all as they live hand to mouth.
I hate spruiker talk - b'shit truisms abound.
Refering to the article, this is a growing problem as the peak of average interest rates hasn't even reached its peak yet (ie still actually going up) as the remaining low fixed rates get rolled onto higher rates. Of course this isn't mentioned by mainstream media.
Those thinking there are going to be house price increases now are incorrect as mortgage interest rates of 6s or even 5s are way higher than the 2s and 3s we were acustomed to plus DTI of 6 will be enough to keep the property market subdued for some time yet
I'm no economist but there has to be a more elegant way of reducing the discretionary spending of the NZ population than targeting those with a mortgage (and by repercussion renters I guess) and giving it to the banking sector.
This may be naive but wouldn't we be better off as a nation if mandatory retirement contributions were increased or a similar mechanism. We'd at least be helping to fund internal problems rather than gifting it? I'll prepare myself for the onslaught of smarter folks on interest.
Yes, this would be a much better idea. But not in line with our adherence to free market capitalist assumptions. Mandatory retirement savings would be considered North Korean here. Meanwhile, we all are so content with giving the banks huge amounts of money. It's fine because it's a business and we're choosing to do it. What a load of....
Why did the RBNZ lift LVRs in 2020? What a stupid move. At the time almost everyone on this site thought the same thing. They lifted with 1 weeks consultation because removing regulation requires less due diligence than imposing one. Yes, an assumption straight out of the Milton Friedman School of hard knocks. Well, they sure showed us that removing a regulation can have disastrous effects. Meanwhile it took them months and months of consultation to reinstate the LVRs, even though the market was out of control. So much so that banks had to start regulating themselves, ANZ reimposed lending requirements in line with the LVRs before the RBNZ did. That is just insane.
Interestingly, considering house prices had been added to their mandate at that point in time by the labour government. Additionally, if it's not in their mandate why do we even have LVRs? It is within their mandate to reduce fiscal risk to our whole system, and letting people borrow and over leverage like idiots creates risk for all of us.
The Reserve Bank noted that the decision to remove LVR restrictions in April 2020 was, amongst other things, to ensure LVR restrictions would not discourage banks from granting mortgage deferrals. Under the mortgage deferral scheme, interest continues to accrue on a loan thereby increasing the LVR of the loan. The Reserve Bank also cited a desire to ensure credit flow and to support the economy.
Austerity policies were exactly what we needed to tame inflation instead of insane spending by the last bunch which just prolonged and made the inflation battle worse.. RBNZ should have cotton onto this new approach and been proactive, whereas they've now left it to late and have to be recklessly reactive.
Agree with you though, there's going to be hard and fast reduction in the OCR, 4.00% or 4.25% by year end.
Sorry I don't quite get what you mean.
I'm looking at this chart here
https://www.interest.co.nz/charts/real-estate/median-price-reinz
6.6% from 30 Nov 23 - 30 Nov 24
7.1% from 31 Dec 23 - 31 Dec 24
Traffic chaos at Auckland Airport as the new mall opens, and I'm supposed to believe we're on the brink of Great Depression 2.
Yeah, right!!!
https://www.nzherald.co.nz/business/manawa-bay-auckland-airport-mall-ch…
But most were just desperate to have somewhere to call their own to live in and couldn't see prices coming back again anytime. It's all so easy to sneer at in hindsight. It's disgusting how banks have been allowed to 'bait n switch' so many young people in the way they have. Remember back in 2020/21 everyone being so reassured by lenders that this situation would never be allowed to play out? Sure, it's free will to buy at the price point you like (though when the alternatives are pretty dire, is it much of a choice?), and yes the reserve bank has had to ramp rates unexpectedly fast for a reason, but at any time rules could've been put in place to prevent this all happening to the extremes that is has. And they chose not to.
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