Mortgage pain to continue for fixed rate borrowers

Sizeable portion to roll off in 2024 – Infometrics

Mortgage pain to continue for fixed rate borrowers

Despite just over 18 months of official cash rate rises, a sizeable group of mortgage borrowers are yet to experience higher interest rates, according to economic consultancy Infometrics.

While the effects of 525 basis points of monetary policy tightening between October 2021 and May 2023 have flowed through to retail interest rates, mortgage borrowers on existing fixed rate loans are insulated from these rises until their loans roll off onto current rates.

This pool of borrowers are increasingly seeking the help of mortgage advisers to help them to plan for and accommodate higher repayments into their budget, restricting their mortgage if necessary.

Standard floating mortgage rates across the main five banks now sit at 8.50% to  8.69%, one-year fixed rates from 7.35% to 8.35% and two-year fixed rates from 7.05% to 8.05%.

Infometrics director and chief forecaster Gareth Kiernan (pictured above) said that based on data available in early November, around 14% of fixed lending would roll off in the final quarter of 2023 (October to December), with a further 12% estimated to roll off through the first quarter of 2024.

Fixed rate mortgage rollovers to continue next year

Speaking on NZ Adviser Talk, the NZ Adviser podcast on November 1, Kiernan said that looking at the current profile of fixed lending, there appeared to be sizeable chunk of lending due to roll off fixed rates from around mid-2024.

“When we look through the history, it does look like there’s an outsized proportion of people who fixed for three years around the second half of 2021,” Kiernan said.

With annual inflation having reduced over the last three quarters, currently at 5.6%, Kiernan said there was some hope for borrowers that the peak in mortgage rates had now been reached, and that rates would  start to head downwards next year.

“We may not be quite there yet but as we head into 2024, we do think that retail mortgage rates will reach a ceiling and possibly ease back a little,” he said.

Mortgage repayment jump between 2021 and 2023 significant

Based on Reserve Bank of New Zealand lending statistics, in mid-2021, the average size of a new mortgage at that time was around $327,000 (including top-ups). In the scenario where a borrower had fixed at 2.6%, the mortgage repayment would be around $680 per fortnight.

If that same borrower were to refix in mid-2023, they would pay around $1,030 per fortnight – around a 50% jump in repayments, Kiernan said.

Based on the same scenario, for a first home buyer (or someone who is buying the national median house value of $816,000 at that time) with a 20% deposit, total borrowing would have equated to just over $650,000. Repayments would have been around $1,360 per fortnight and would now be pushing up to over $2,000 when refixing.

“That is a huge increase that people are facing if they fixed for two years back in 2021,” Kiernan said.

Higher mortgage rates likely to be a one-to-two year scenario

Looking ahead to 2024, Kiernan said that one of the key factors for borrowers and mortgage advisers to understand was that higher mortgage rates were likely to be a one-to-two year scenario.

Where borrowers are rolling off a lower fixed rate and are refixing at a 7% rate, there’s an expectation that “that is probably the worst of it,” he said.

“If you are able to manage the repayments when you come up for refixing through 2024, the expectation would be out into 2025 or 2026 when you next come up for renewal, that you’ll probably be in a bit of an easier situation by that point in time,” Kiernan said.

Borrowers struggling with higher interest rates could take comfort from knowing that its likely to be the toughest time coming up in terms of repayments, and it would be important to look at what they could do in the short term to manage through that over the next one to two years.

Another point to bear in mind heading into 2024 is what the interest rate curve looks like.

“Typically what we’ve seen in the past that when longer term fixed rates are the lowest ones on offer, that’s generally the time that you don’t want to be jumping into those four and five-year fixed rates,” Kiernan said.

“That’s because there is the potential for quite a lot of regret as mortgage rates come down the other side.”

Previously, forecasters had considered that rate cuts may occur in the first half of 2024 – now the expectation is that it could now be into 2024 or 2025 before central banks start to cut rates because inflation hangs around for longer, Kiernan said. He noted that 10-year wholesale interest rates in New Zealand had pushed up by around 1.5 percentage points over the previous five months.

“That’s why we’ve seen those fixed mortgage rates just pushing up … they’ve all been going up a little bit to reflect the fact that those wholesale funding costs have pushed up, because there are fears about how long inflation might stick around,” Kiernan said.

Taking inflation and unemployment trends and data into account, Kiernan said that Infometrics’ view was that there would probably not be the need for the Reserve Bank to raise the official cash rate further in the current cycle.

“It’s probably out until late 2024 before the OCR starts to get cut and even then, when those cuts do start coming through, they’re not going to be rapid as the rate of increase we saw in 2022 and the early part of 2023,” he said.

Infometrics expects that by the end of 2025, the official cash rate will be around 4%.

“When you translate that through into retail mortgage rates, I wouldn’t be surprised if in two years’ time, we’re still looking at interest rates sitting at that 6% level,” Kiernan said.

In an update following the official cash rate announcement on Wednesday, November 29, Kiernan said that Infometrics' view was that the Reserve Bank wanted to ensure that interest rate cuts were not priced in by the market prematurely.  "We are sticking to our forecast that the OCR is at its peak of 5.5%, but the possiblity of another rate hike or two in 2024 is much more of a "live"option than the Bank applied in October," he said. 

How are you helping clients rolling off lower fixed mortgage rates? Share your thoughts in the comments section below.