EXPLAINER: Mortgage rates could rise as much as 1.5 percentage points, but most households can cope, according to economist Gareth Kiernan.
The hikes will reduce household purchasing power in six to 18 months, but mortgage rates will still be lower than before the Covid-19 pandemic, said Kiernan, chief forecaster at Infometrics.
But most households, even recent buyers with large home loans, should be fine, he says.
ASB led the way on Wednesday by raising mortgage rates slightly, as banking economists predicted that with the heat of the economy, the Reserve Bank’s official cash rate would start rising next month.
“Mortgage rates could increase by 1.5 percentage points [by the end of 2023], but you would still talk about a range below 4 percent, ”says Kiernan.
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“Before Covid, it was pretty much unprecedented. It would still be affordable, even for people who bought in the past year, ”says Kiernan.
“Yes, they would be heavily in debt, but the banks have set significantly higher test rates around their stress tests.”
Infometrics chooses the official cash rate to reach 1.5% by the end of 2023, compared to 0.25% currently.
Even small increases in payments make a big difference.
What will this do to the household finances?
This will reduce household spending, Kiernan says, but it will not bring down house prices.
“Mortgage rate hikes of this magnitude will not be enough to push home prices down, even with residential consent numbers reaching record highs.
If this prediction turns out to be true, there will be no worry that people will see their home equity erode or move into negative territory.
In the first five months of the year, just under $ 1 in $ 10 in new mortgage loans from banks was issued to homeowners with a deposit of less than 20%, according to data from the Reserve Bank.
The test rates Kiernan talks about are the interest rates that banks use to calculate whether potential borrowers can afford the home loan they’re asking for.
Instead of calculating affordability based on their current income and expected post-mortgage spending using current mortgage rates, banks typically do the math as if mortgage rates are 6-7%.
This should mean that borrowers can face a near doubling of the mortgage rate before they start to struggle.
Bigger mortgages mean more pain
For first-time buyers and people with large home loans, this could be painful.
An increase in a borrower’s overall borrowing rate by 1 percentage point, from 3% to 4%, would incur an additional interest charge of $ 1,000 per year for every $ 100,000 he owes. the bank.
Data from the Reserve Bank shows that in the first three months of the year, $ 4.2 billion in home loans went to borrowers whose loans were five times or more their income.
Those with an average gross income per household of just under $ 110,000 are expected to $ 550,000 or more, so a 1 to 1.5 percentage point increase in their borrowing costs implies an additional interest cost. on the home loan of $ 5,500 to $ 9,900.
Other rising costs of living
Kiernan says employment remains strong, so most households won’t be worried about their job prospects.
But rising mortgage rates will not be the only increase in the cost of living that households will face.
“Inflation could exceed 3% this year, with growing questions about the Reserve Bank’s assumption that this spike will be temporary,” Kiernan said.
This was caused by pressures such as the tripling of container costs for international shipping, the rise in commodity prices due to the recovery in global demand, the rise in oil and electricity prices. and higher wages needed to attract and retain staff in an increasingly tight labor market, he says.
Save $ 1000 on your expenses
Financial advisor Hannah McQueen says many households can save money on their expenses.
But that could be bad news for the hospitality industry.
“The easiest place to save money is with food and drink,” she says.
Eating at home instead of eating out can save households money, which can quickly translate into big savings.
“The next place to find it is in your mortgage structure and insurance,” she says.
This involved people getting advice and looking for better deals than they currently have.
Then find several small cuts on household bills, but it takes a little while to achieve, she says.
McQueen also finds that people can reduce their daily “discretionary” spending without ruining their sense of happiness in life.