Home loan interest rates have risen sharply in the last year. Photo / 123rf
Nearly half of New Zealand’s mortgage debt is due to be refixed between October 2022 and September 2023 and some borrowers are likely to see a big jump in their repayments.
Mortgage rates fell to
record lows of around 2.25 per cent as the official cash rate was slashed to 0.25 per cent in May 2020 but the OCR has risen sharply since October 2021 and is currently at 4.25 per cent, with the Reserve Bank forecasting it to go to 5.5 per cent.
A one-year fixed term rate is now over 7 per cent for a standard rate and around 6.5 per cent for those with 20 per cent equity.
For a borrower with a $300,000 mortgage, jumping from a 3 per cent interest rate to 6.5 per cent could mean having to find an extra $600 a month while a $500,000 borrower may have to find an extra $1000 a month – all while other costs are rising.
Tom Hartmann, personal finance lead at Sorted, says for a lot of people this will be the first time they have experienced rising mortgage rates and he recommends borrowers keep a close eye on the changing environment.
“The first thing is to really gather information on how it has been changing and how it might change in the future – which we really don’t know. It would be a mistake to act like rates were going to go higher or stay high.
“We just really don’t know because they can also come down quite quickly. For now, because it is so changeable, just keep track of what is going on. And then understand ahead of time what it will mean for you specifically in your household.”
Websites like interest.co.nz and the Herald have mortgage rate tables that are updated regularly and show when banks change their rates. They also make it easy to compare the different rates lenders are offering, allowing consumers to shop around.
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Figuring out exactly how much the interest rate rise will be for you in dollar figures simply involves plugging the numbers into a mortgage calculator. These are offered by the banks or money education site Sorted.
Hartmann says its mortgage calculator is the most popular tool on the Sorted site and it often sees a spike in use after an OCR change.
“Our second most popular tool is our budgeting tool. Once you start to figure out what it could mean in terms of mortgage payments then you have to figure out how it fits into your whole picture.
“The budgeting tool can be used to charge all your incomings and outgoings and really understand the full picture, and then of course adapt. Hopefully, there is some flexibility in people’s budgets where they can get through a high-interest period.”
But if not, there are options for people who find themselves in difficulty because of rising rates.
“Unfortunately a lot of us tend to try and do it tough and do it on our own which is really good up to the last moment until it becomes too uncomfortable.”
Hartmann says it is best to talk to your lender early if you are worried.
“We tend to be optimists and believe our situation will change, we will get more work, find something on the side. Instead of that we recommend having a conversation early. The bank, more than anything, would like that continuous stream of repayments to continue so they will generally be helpful to do whatever they can.”
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Bruce Patten, a mortgage broker at Loan Market, is advising people worried about moving on to higher interest rates next year to start saving extra money now so they have a bit of a backstop.
“All these people have had this extra money – half of them have been putting it in the mortgage because they haven’t dropped their repayments.
“The other half have either started in the last two years and been only on these lower rates or they have reduced their repayments in line with the lower interest rates, so now what they have got to do is start increasing them again to be prepared for it.”
Others may need to take on more work to make up the shortfall.
Like Hartmann, he recommends borrowers contact their bank early if worried about not being able to make higher payments – don’t wait until you have missed a payment before asking for help.
“Once you are in default, you are already on the back foot and the bank is going to be looking for a solution of how you are going to get out of it and if you can’t, it makes it difficult.
“Whereas if you front-foot it and approach them at least a couple of months prior to your loan rolling on to that higher rate, it gives them plenty of time to give you some options. I would say at least two months to any rollover of fixed rate, or well and truly before you default on your mortgage,” he adds.
“At the moment the default rate is no higher than it has been at any other time. We are not having huge issues but we are having phone calls.”
What are the options?
Extending the term of a mortgage can be one of the easier options to take. Often, when a borrower first takes out a mortgage, it is for 25 or 30 years and that reduces each year it is paid down. Extending the term back out to 25 or 30 years can decrease the payments but also means you will be taking longer to pay it off and paying more interest.
Sorted’s Hartmann says increasing the term could radically change the amount of interest you pay. Its mortgage calculator gives a breakdown of principal and interest payments and shows the extra interest costs.
A $300,000 mortgage paid off over 25 years will see you pay $307,686 in interest on top of the principal at a 6.5 per cent rate. Stretching the term out to 30 years increases the interest bill to $382,633.
Patten says borrowers also need to be aware of age restrictions on stretching out the term.
“If you’re 50 years old, the bank might be reluctant to reset you to a 30-year term because that is going to take you to age 80.”
Another option can be putting part or all of the mortgage on interest-only payments.
Patten says going interest-only for a while might allow the borrower to get through the peak of the rates until settling at a lower level.
Banks generally have a maximum period of two years of interest-only on owner-occupied property.
“But they might do that one year at a time and then ask to review it. It will require a full application. The bank will want to reassess your capability and make sure that they are not just delaying the inevitable in that you can’t physically afford it.
“They will want to reassess it, but they are generally user-friendly – they don’t want to make you sell your house.”
In a worst-case scenario, borrowers can also apply for a mortgage deferral, sometimes called a “mortgage holiday”, where payments are put on hold for a period of up to 90 days with the missed payment added on to the mortgage. This option became widely available for borrowers in 2020 when the Government reached an agreement with the banks, but that is no longer on offer.
Patten says borrowers need to be careful not to use this to ease the pressure in the short-term, only to make things worse in the longer term.
“During the GFC [Global Financial Crisis] lots of people went to the bank and got mortgage holidays and they were just given it. What the banks found was in 90 days, those people started defaulting because all they were doing was delaying the inevitable.
“If they had told the bank upfront, ‘Hey, by the way, I have lost my job and I’m not working at the moment,’ they could have avoided adding three months’ worth of interest to the mortgage because that is what happens with a mortgage holiday.”
Mortgagee sales have been very low this year but are slowly on the rise.
Ben Kelleher, managing director of personal banking at ANZ, says its research suggests people are reluctant to contact their bank because they think the bank might try to sell their house.
“That’s the very last resort. It can take years to get to that point. They are very rare. Over the last year I could count on my hand the number of mortgagee sales.
“Often the customer will come to their own conclusion that they are best placed to sell the house, particularly in a market that is going down or softening – you want to be able to action that sooner rather than later if the market is going backwards.
“We always work with the customer to explore all the options first.”
Kelleher says many mortgagee sales are because of issues like leaky homes, marital issues where one or both partners walk away from the debt, or when people leave New Zealand and the bank is left to pick up the pieces.
“We hear the consumer’s concern about families being kicked out on the street – that is certainly not the case and we will do everything we can to ensure that’s not the case.”
While selling can be the only option sometimes, Patten says in his experience it is better to do everything possible to hang on to the property.
The broker cites an example during the GFC when he knew two couples in nearly identical situations where the husbands lost their jobs.
“One just sold up and was left with a debt and ended up owing that money to the bank. The other one broke their fixed rate and got the bank to add the interest cost to his mortgage and then he just did whatever he had to [to make the payments].
“When you are selling not to re-buy in a falling market you are going to take a hit, especially if you have bought in the last two years – if you can avoid it in any way, shape or form you should do.”
He says some owners rent the house out. One young couple he dealt with recently had done just that and moved in with their parents in order to keep paying the mortgage. Other options include getting a flatmate or boarder.
“That’s obviously something a lot of people don’t want to do or like to do but if it means keeping the house… where possible you want to avoid selling at all costs.”
Divorcing or separating can also be difficult for borrowers, especially those who may have bought recently and seen the value of their property go backwards.
Patten says one young separating couple were unable to sell at auction and looked like they would lose about $150,000 on the purchase price. But he managed to sit them down with their parents and agree to keep it.
“They are now keeping the property, renting it out. They each pay $135 a week towards the mortgage to top it up. The parents are managing the rent on it and the agreement is they will keep it for at least four years or until they can sell it for either a break-even or profit.”
But it is not always possible to reach an amicable decision, Patten says.
There is talk of recession and potential job losses in 2023 despite the current strong labour market.
Kelleher says job losses could happen at any time and advised borrowers to contact their bank as soon as possible if it happened.
“Often people get really worried. But we understand that can happen to people at any point through the life of their home loan. We will work with customers to work through an option to keep them in their home and make sure they have a good plan to move forward.”
Patten says good communication is vital.
“The key thing we say to people is, ‘Don’t bury your head in the sand’. That is what happened during the GFC. So many people just buried their head in the sand and it was what caused most of the issues.”