Borrowers still hurting despite interest rates hold
The official cash rate is unchanged at 5.5%, the Reserve Bank of New Zealand has announced.
Delivering the final Monetary Policy Statement and OCR for the year on Wednesday, the RBNZ left the wholesale cash rate unchanged as widely forecast, but with a warning that if inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.
The decision marks the fourth consecutive official cash rate pause this year, Kiwibank chief economist Jarrod Kerr and Infometrics director Gareth Kiernan having said earlier in November that they did not expect the Reserve Bank to see the need to raise the official cash rate further.
Josh Bronkhorst (pictured above left), the CEO of Link Financial Group, acknowledged that Kiwi borrowers had already endured “relentless interest rate increases”, the official cash rate having risen from a record low 0.25% to 5.5% in just over 18 months. The November pause provides “a glimmer of hope” that a rate decrease is in sight, he said.
Heather Roney, director and financial adviser at Mortgage Ladies and Co (pictured above centre) and Jayant Diesh, mortgage adviser at Mike Pero Mortgages (pictured above right) agree that interest rates being at or near the peak is positive for mortgage borrowers.
Following a peak of 7.3% in the June 2022 quarter, the annual Consumer Price Index has dropped over the last three quarters, reaching 5.6% over the September quarter.
In a Monetary Policy Statement released on Wednesday afternoon, Reserve Bank of New Zealand governor Adrian Orr said that interest rates were restricting spending in the economy and consumer price inflation was declining. Economic growth remained below trend and is likely to slow further, he said.
“The Committee is confident that the current level of the OCR is restricting demand. However, ongoing excess demand and inflationary pressures are of concern, given the elevated level of core inflation,” Orr said.
“If inflationary pressures were to be stronger than anticipated, the OCR would likely need to increase further.”
The Reserve Bank has revised its forecast peak for the official cash rate to 5.69% in the third quarter of 2024 and has pushed out the timing for the OCR to move below 5.5% to mid-2025, indicating an 18-month timeframe before the first rate cut.
Interest rates a challenge for existing borrowers
Bronkhorst said that while the decision to hold the OCR was positive, it did not remove the continued pain for many households as increased mortgage repayments impact their cashflow, along with the well-publicised ‘cost of living crisis’.
Roney confirmed that mortgage stress was evident within her client base and said that an increasing number of mortgage holders in “panic situations” were coming to her for help.
“We’ve still got a period of 6-12 months ahead where clients are going to be coming off onto higher rates and it is creating uncertainty for them…concern about how they’re going to manage the mortgage payments moving forward,” she said.
Roney said that she had involved many of her existing clients in “future planning” to help them to structure their mortgage to manage risk and get them used to managing a higher level of interest rates.
For example, some clients who purchased property in 2020 and 2021 when interest rates were low started on a 20 or 25-year term, which could provide the option to extend the term back out, she said.
Diesh also cited higher interest rates as a concern for existing borrowers, saying that while there was a tendency for borrowers to ignore the situation until the fixed rate roll over date, some wisely choose to discuss their options with an adviser in advance.
“I tell clients to live like they are already on those higher rates and to see how they are impacted,” Diesh said.
Due to their equity (LVR position), new homeowners may not be able to refinance away from second tier lenders, meaning they could be stuck on higher rates longer than anticipated, he said.
In some cases, borrowers are getting boarders in or working a second job to keep up with the repayments.
“A lot of new home owners are fed up with the higher interest rates and are delaying major expenditure and holding off on renovations ... it's a bit of sit around and nervously wait situation for them,” Diesh said.
Diesh said that he was recommending to clients to review their finances and to record a budget to identify any spending that can be cut back. If this is insufficient to meet the jump in repayments, he then looks at options such as making interest-only repayments in the short-term.
Mortgage applicants subject to higher test rates
Bronkhorst said that while first home buyer activity had increased, their borrowing power had been “significantly eroded”.
He acknowledged that stress test rates (the rate at which banks stress test a borrower’s ability to repay a loan) had increased to ensure loans were affordable long-term.
“We know that the employment market has been pretty robust in the last couple of years so in many cases first home buyers find themselves earning more than three years’ ago but are unable to borrow as much as they were able to borrow back then,” Bronkhorst said.
“In short, first home buyers are more reliant on more realistic sellers in the market place to make their property ownership dreams a reality,” he said.
Mortgage lending picking up
Bronkhorst said that over the past 12 months, the aggregator’s total lending volumes were down by an average of 20% year-on-year, and that it had been “steadily clawing back” the annual deficit.
“Currently we are 12% down year-on-year; however, based on mortgage activity across our network over the last 2 months, we are very confident that we will make up the remaining deficit over the next few months,” Bronkhorst said.
While the official cash rate has once again remained on hold, fixed mortgage rates increased over October and November off the back of increases in wholesale funding costs, since reported to have come back down.
Following the Reserve Bank announcement, Kiwibank economists said that despite the RBNZ's updated OCR track, which pushes the first rate cut to 2025, they believe that it could be in a position to normalise policy next year.
Rate cuts could occur later in 2024, they said. They expect the inflation rate to be back within the RBNZ's 1% to 3% target range by mid-2024, "confidently returning to the 2% target".
Kiwibank has updated its interest rate forecast, with a first rate cut pencilled in for November 2024, the bank's economists noting that the RBNZ would need further data before changing direction.
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