Low deposit home loan borrowers face rising debt burden, economist warns

Mortgage rates could begin to rise from the end of this year, putting pressure on those who have taken on high levels of debt in recent years.

That’s the warning from Jarden economist and strategist John Carran after the Reserve Bank signalled last week that it is likely to begin lifting the official cash rate [OCR] from the middle of next year.

The official cash rate is at a record low 0.25 per cent.

Carran said the Reserve Bank’s forecast track suggested it would lift the cash rate to 0.50 per cent by September next year with two further hikes by June 2024.

“This track was missing from the RBNZ’s previous Monetary Policy Statement, which suggests its reintroduction this time is intended to send a signal that the outlook is clearer and likely warrants a higher OCR.”

If the cash rate is lifted next year it will be the first time the rate has gone up in more than eight years – the last time it rose was in April 2014.

The official cash rate has the biggest influence on floating mortgage rates but also influences shorter term fixed mortgage rates. Most mortgages in New Zealand are currently fixed for around one to two years or less.

“No doubt if those OCR increases come to pass, and they are contingent on the forecasts turning out as the Reserve Bank expects, it does seem a reasonably high likelihood in my view, they will be passed through to mortgage interest rates. You can expect mortgage interest rates to start rising.”

Carran said the signal from the Reserve Bank meant some banks would anticipate the increase in the cash rate with rises in mortgages rates for longer-term fixed mortgage rates ahead of the rise.

While shorter-term rates and floating rates were likely to lift closer to the time that the cash rate rises.

“You could see some of those longer-term mortgage rates start to go up towards the end of this year. It won’t be until they hike some [rates] will go up, but some will go up in anticipation.”

Carran said a lot of people had entered the property market since 2014 which meant for many it would be the first time they have faced mortgage rates heading upwards.

“For some people, particularly those that have recently entered the market with low deposits on their lending it may be quite a burden when those rates do start coming up.”

Reserve Bank figures show mortgage debt has increased by more than 17 per cent in the past two years alone.

As of April 2021, New Zealanders had $313 billion in residential property loans -up from $266b in April 2019.

“With such high levels of mortgage debt, rising mortgage rates will have a material impact on mortgage holders,” Carran said.

He estimates monthly payments on a $600k property where the buyer had put down a 20 per cent deposit on a 25 year mortgage at a one year fixed rate of 3.24 per cent would increase from $2337 a month to $2465 a month if rates were to rise by 0.5 basis points – an annual rise of $1544.

For an $830,000 house, a 0.5 basis point increase in rates would see the monthly payments increase from $3232 to $3410 a month or an annual rise of $2135.

While a person paying a mortgage on a $1.2m property would see their monthly payments rise from $4673 to $4930 or $3087 a year.

But, on the flipside, there could be some good news for deposit holders who have suffered from the lowest term deposit rates in history. A situation that has forced many to seek better returns elsewhere.

Carran described it as a “glimmer” of hope for savers.

“It will provide a bit more in the pocket for those that rely on fixed income and term deposits in particular.”

If term deposits do become more attractive some investors may elect to bring their money back from shares.

Carran said there was “no doubt” rising deposit rates would be a headwind for the sharemarket.

“It certainly will be a bit of a headwind from two perspectives – one it makes receiving dividends slightly less attractive because it is riskier to get income sourced from thereand secondly the discounting of future earnings will be greater with higher interest rates so that tends to lower values.”

But he said that would also be offset to a degree as earnings growth was likely to be largely positive for the foreseeable future.

“It’s a bit of a pull both ways.”

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