Borrowers will have to stomach higher interest rates each time they come up to a loan repricing
Kelvin Davidson (pictured above), chief property economist at CoreLogic NZ, has revealed the five key issues facing borrowers, who have had to stomach higher interest rates each time they come up to a loan repricing.
The refinancing wave remains significant in 2023
Around 50% of existing loans (by value) were currently fixed but were set to be repriced within the next 12 months, while a further 10% were floating. This meant that around 60% of loans would likely see a further rise in interest rates over the next year or so.
“Clearly, this means that many households will need to readjust their budgets and that will remain a restraint on the wider housing market for a while yet,” Davidson said.
Mortgage rates will likely increase substantially
“We don’t know precisely when all of these borrowers originally took out their loans, and therefore the starting interest rates they are changing from,” Davidson said. “However, if we make the reasonable assumption that a lot of borrowers have simply been on a series of rolling one-year fixes, the change that many will be seeing as they reprice is still in the vicinity of 2-3% for most of 2023.”
For example, a borrower with a $500,000, 30-year mortgage repricing from 4% a year ago to 6.5% now, will see their mortgage repayments increase by around $9,275 per year.
Mortgaged households are showing resilience
Despite the clearly looming financial challenges for many households over the coming months, the repricing process seen to date has been fairly smooth, Davidson said.
“So far, loan repayment problems and non-performing debt on the banks’ books remains very low, even though many borrowers have already moved from the ultra-low 2-2.5% rates onto a higher level,” he said. “However, we should still be mindful of recent Centrix data reporting a lift in borrowers missing repayments.”
Minimal job cuts will be a helpful buffer
The unemployment rate is tipped to rise over the coming months, which could make it tougher to maintain a smooth repricing path. The Reserve Bank of New Zealand is expecting this increase, however, to be more about people coming into the labour market but struggling to find work as new job creation slows down, rather than about mass job losses.
“In other words, people who already have a job and a mortgage should be somewhat insulated over the coming months, helping them to manage higher repayments,” Davidson said. “But it’ll be tricky for new entrants to the labour market who might be aspiring to own a home.”
Another potential piece of relative comfort comes from RBNZ data on interest-only (IO) lending, which showed that IO activity remains “controlled,” both in terms of the flow of new lending and the stock of existing loans.
“As we saw post-COVID, a shift of some borrowers onto IO terms could also be a temporary buffer this time around too,” Davidson said.
Pay attention but don’t panic
Davidson said CoreLogic will keep a close eye on the repricing process and watch for any signs that bad debts are appearing which might potentially lead to mortgagee sales.
“But the projected resilience of employment is a helpful buffer, and by the end of the year, we suspect that this mortgage repricing flow will have become less of an issue – as most repricing events from then on will be from ‘high to high’ in terms of mortgage rates, rather than the ‘low to high’ as we’re currently seeing,” he said.
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