Thousands of first-time homebuyers could face problems as interest payments rise

There are fears that thousands of homebuyers will find themselves in financial difficulties due to rising mortgage rates as the Reserve Bank tries to fight inflation.

Many will pay thousands more each month to service their mortgages.

The investigation of the bank itself, which was made public The New Zealand Herald According to the Official Information Law, it is estimated that almost half (49 percent) of people who bought their first home last year during the market peak could face “service anxiety” if interest rates reach 6 percent. .

This would hit the tens of thousands of buyers who took on debt at historically low interest rates, who will now find themselves repaying their mortgages at much higher interest rates.

First-time homebuyers borrowed $ 17.88 billion on 32,493 individual loans last year. This lending was almost $ 8 billion higher than in 2017, when first home buyers borrowed $ 10 billion on 23,702 loans.

A Reserve Bank document from September last year warned that these people could face “service anxiety”. This does not mean that the borrower will go bankrupt, but instead counts the number of people who will need to “sharply reduce their living expenses” to maintain their mortgage.

Banks usually check if borrowers can continue to service their mortgages at interest rates of at least 6 percent before offering them a loan.

Interest rates are already rising by 6 percent in some banks. ANZ reacted to last week’s official cash interest rate decision by raising lending rates. The normal fixed interest rate for 2 years is now 5.85 percent. Kiwibank and Westpac both offer fixed 2-year interest rates above 5 percent.

Mortgage broker Bruce Patten warned that interest rates “could definitely” reach 6%.

“I hope they will not do it,” he said.

Infometrics economist Brad Olsen said he expects two-year interest rates to fall just 6%.

“If the Reserve Bank raises more aggressively than we expect it to need, we could avoid a fixed interest rate of 6% for two years,” Olsen said.

Last week, the Bank raised its OCR by 50 basis points to 1.50 – the biggest jump in 22 years. Markets expect a new 50 basis point increase in May, but this will not necessarily flow into mortgage rates, which have already been priced higher.

“If we look at a fixed interest rate of 6 percent for two years, I would expect it from late 2022 to early 2023,” Olsen said.

He noted that the two-year fixed interest rates had already risen faster than the cash rate, implying that banks had already priced the changes.

“The faster two-year rate hike means that larger increases in OCR will not necessarily push the two-year rate one-to-one,” Olsen said.

A March survey of economists by the financial website Bloomberg showed that interest rates would reach 5.5%.

One person who is going to face higher mortgage rates is Patten’s son Liam, who bought his first house in Pakuranga last year.

Liam said he was “a little worried” about borrowing costs that would rise when his term expires next year.

He estimates that his annual borrowing costs could increase by an additional $ 25,000 once he leaves office.

Liam has turned his garage into an extra room and living space, where he lives so he can rent the house.

He worries that rising interest rates and an uncertain economy could make things difficult, and has set aside money to help meet rising costs, but he’s not sure if those savings will be enough.

“If I save $ 100 a week for a year, that’s $ 5,200 – so be it [$25,000] “It’s a huge extra,” Liam said.

The government says interest rates are still at almost historically low – lower than when it took office.

But the amount of money borrowed by home buyers to enter the market has increased. According to Reserve Bank data, the average first home mortgage was $ 434,782 in 2017. Last year it was $ 547,800.

This will translate into a big difference in repayments. An Auckland home buyer may have borrowed $ 750,000 last year at 2.6 percent. If mortgage rates were as high as 6 percent, this mortgage would cost more than $ 1,500 more each month – about $ 4,500 a month in total.

Bruce Patten said that wherever the rates reached, there would be pain.

“There will be people who will have to sell and sell out.”

He added that some older first-time homebuyers who had to sell “failed to make a 30 percent capital gain at the time”.

“They may make some money, but they should reduce it.”

Patten said banks may have questions to answer if mortgage rates reach 6 percent.

“I think they’re going too far right now,” Patten said, noting that banks could adjust their profit margins to certain interest rates to reduce the pain.

National housing spokesman Chris Bishop said first-time homebuyers were feeling the effects of inflation on their mortgages.

“They had to buy in a housing market where prices have skyrocketed under the Labor era and are now experiencing significant increases in interest costs as the Reserve Bank tries to control inflation.”

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