Low interest rates and modest drawdown growth are revealed in a detailed look at the components of our home loan market

By David Chaston

In the year to March 2017, banks charged mortgage borrowers $10.8 billion in interest. But that was the lowest dollar amount, at the lowest interest rate, since this [short] data series has been available.

The RBNZ data report C35 allows us to follow the money flows though the bank mortgage market.

This is a view that strips away some of the myths that have built up. But it also allows us to focus on what is really going on in this market, one of the largest in our economy.

As at March 2017, homeowners and investors had borrowed more than $230 billion against our residential housing.

Overall, this is 'only' about ~20% of the value of all housing and land used for residential housing. (The RBNZ has changed the way it reports this 'value'. In its C22 report on the comprehensive household "balance sheet" it reveals this value as $751.5 bln as at September 2016, but it now excludes from that the values owned by property investors because they are "notional businesses" and that data is now rolled into the business asset category which is not as transparent. Our estimate is that the total value is now about $1.1 trillion, but this is really just a guesstimate.)

In the year to March 2017, borrowers drew down $74.5 bln in new loans, which was actually only +2.1% more than in the previous year. Most readers will be surprised to know that this drawdown growth was so low and in fact less than GDP growth. The real drawdown growth came in the previous year to March 2016 when it shot up a remarkable +24.5%.

And borrowers paid $10.8 bln in interest in the year, which based on the loan balances at the start represents an overall interest rate of a bit less than 5.1%.

One set of borrowers came to the end of their mortgage contract, paying off their loans in full. These 'final' transactions exceeded $36.8 bln in the year.

The remaining borrowers were committed to paying $15.7 bln in contract repayments of principal. However many of them made additional principal repayments and in surprisingly large amounts, chopping into their liability by an additional $15.5 bln in repayments greater than the minimums required.

However, there were a few borrowers - actually a surprising few - who couldn't make the minimum repayments, and they fell short by $289 mln. This represents only 0.14% of the total mortgage liability, the lowest proportion since this series began. There is no evidence of mortgage stress in this data.

The actual data is in much more detail than summarised above.

In fact, you can separate out this loans that have a high loan-to-value ratio (LVR) of 80% or greater.

This subset of high LVR lending shows it has fallen from 15.3% of all lending in 2015 to just 8.5% in 2017, a shift that is almost a halving.

This is confirmed (in the line "Other Adjustments") that borrowers are clearing out of this category quickly and into loans that are below 80% LVR.

But surprisingly, borrowers in this class are not paying any interest rate penalty, on average. The implied interest rate in the year to March 2015 was just 5.24% and that had shifted to 4.57% in the year to March 2017. I wasn't expecting to find that.

Another somewhat unexpected finding is that the stress indicator - "Repayment deficiencies" - is not materially higher than for the overall level and in the year to March 2017 was only 0.2%.

Even this group of borrowers was able to make "Excess repayments" of $1.122 bln in the latest full year which was two thirds more than the committed regular repayments.

But these borrowers bailed out of their loans at a slightly faster rate than those with a lower LVR mortgage. In fact 18.9% of these types of loans were ended and repaid in full in the year to March 2017, which compares to 17.2% overall.

The overall view from this industry-wide data is of a healthy mortgage book with little sign of stress. Of course there will be exceptions and those anecdotes can generate headlines. But they are certain to be the exceptions.