ASB economists say they detect increased concern among borrowers about the impact of rising mortgage rates.
An increase in mortgage rates by one percentage point would result in about $ 3 billion a year for households with mortgage debt, with first-time buyers being the hardest hit, said Mike Jones, senior economist at ASB.
Some new homeowners could even find themselves spending more than half of their income on mortgage repayments if mortgage rates rise to 5%.
But with mortgage rates currently at very low levels, Jones said most borrowers have a reasonable amount of buffer to deal with the increases.
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“People are starting to worry about the impact of the possibly higher mortgage rates over the next two years,” Jones said.
Concerns have arisen from high household debt, both as people borrow to buy new homes, but also because many have chosen to borrow to renovate their existing homes.
“Mortgage loans have gone crazy. Ever higher house prices meant that more debt was needed to enter the real estate ladder or to move up, ”Jones said.
New mortgages written in the past 12 months have increased by approximately 45% over the previous 12 months.
But despite the huge amount that rising mortgage rates could suck into households, Jones said ASB tests indicated households, on the whole, had a reasonable amount of buffer to make. face.
“Rates should rise fairly before incomes are unduly stressed,” he said.
“On our calculations, the aggregate debt service costs and housing debt levels are at the lowest levels on record,” Jones said.
This was the result of falling interest rates to the point that central banks around the world cut official cash rates to boost economies ravaged by Covid.
But, Jones said, some borrowers were more exposed than others to rising home rates.
Data from the Reserve Bank showed that many buyers over the past 12 months had taken on debt of at least six times their income.
“New entrants to the housing market generally have less equity and a simple stress test shows that debt servicing costs for these borrowers could exceed 50% of disposable income if mortgage rates really rise,” a- he declared.
“They will generally have lower equity and may not have budgeted for the risk that the yield and interest rates of the past will rise instead of falling,” he said.
“A household with an average disposable income that bought a median house in Auckland a month ago for $ 1.12 million with a 20% deposit would have a debt service rate of around 42% at d current interest, including principal repayments. It’s already up there.
“A scenario in which mortgage rates rise to around 5% would see debt service charges rise to 53% of income, all other things being equal. It’s on the upper limit of what’s considered manageable, ”Jones said.
But, he said: “With the starting point of debt servicing very low, households should be able to tolerate reasonable increases in mortgage rates without undue strain on budgets.
“Our forecasts, both for official interest rates and mortgage interest rates, show only a gradual increase from here on out. Households have the time, ”he said.
“But securing more of your mortgage seems prudent to those worried about rising interest rates over the next few years. Mortgage rates for longer terms are higher than for shorter terms. But they are still very low compared to history and could be worth it given that a borrower will be protected for longer from the higher rates. “
He said 77% of all mortgage debt was fixed rate for less than a year.
Huge household debts could help curb the central bank’s rate hike.
“At the macro level, higher leverage will give the Reserve Bank more bang for its buck when the time comes to raise interest rates,” Jones said.