As we head into 2022, it is clear that home owners need to be prepared for higher mortgage interest rates.
In fact, the signals have been around for a while, and the latest RBNZ data (S33) shows that many borrowers have made an adjustment, taking out interest rate contracts with longer terms. Still, they are the minority.
During 2022, a whopping $151.0 bln is exposed to rate rises this year - and that is only for owner-occupiers. Investors have another $60.2 bln exposed to rate rises in 2022. (And there is another $3.9 bln exposed in mortgages taken out to support business loans.) That means that $215 bln will be rolled over in 2022 at sharply higher interest rates.
For every +25 bps rate rise, that is an extra annual interest cost of $537 mln. If we get two or three +25 bps rate rises in 2022, that could cost mortgage borrowers up to $800 mln. Almost all borrowers will be able to afford it. Banks have been diligent in ensuring they have stress-tested their customers (and especially their newest borrowers) for rate rises well above an extra +75 bps. But in turn, that will be $800 mln that will not be spent in the wider economy. Although annual retail sales exceed $107 bln, taking 0.75% off the top of that will be noticed. And the behavioural change as household tighten their belts with a crimped level of disposable income, could well mean there will be a multiplier impact.
Those that do roll over their mortgages in 2022 could follow the growing trend of taking out longer term rate contracts.
2021 started with 73% of household fixed mortgages due to be rolled over in the year, but ended with just under 60% like that. That is a big shift. Many cottoned on to the wisdom of locking in the very low rates that were on offer through much of 2021 and doing so for longer fixed terms.
Interestingly, investors made the same switch, but not as aggressively as owner-occupiers, taking their exposure to fixed rate contract from 77% rolling over within the year to 64%. Investors have stayed more short-term in their forward outlook.
The same data shows that the fixed term extension by owner-occupiers was away from the 2 year fixed, with more on three years, some more on four years, and a lot more on five year fixed terms.
The psychology might be slightly different in 2022. Rates on offer are no longer at record lows and have already risen about +2%. They are still 'low' in an historical context, but another +2% coming in the next year or two will put them back to the 6% range and more 'normal' from a longer term perspective. However, for some, a 6% home loan rate will be a 'shock'. So the drive to lock in current rates won't be so much as seizing on an unusual benefit, it will be more fear-based, trying to avoid a larger hit to the household budget.
Of course, many of those who did take advantage of the historically low 2+% mortgage rates only took them out for a one year term. And those that took them out early for a two year fixed term will also be facing a noticeable change in monthly payments as they contemplate 2022. Following their fellow borrowers into 3, 4 and 5 years locked-in options will seem like a good option to consider - if your housing situation is likely to be stable.
Floating rates are used by fewer borrowers now than at any time in our history. And in a rising rate environment, the use of floating rates home loans is likely to be driven even lower.
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Heard of several stories where owners’ mortgages are up for renewal (fixed period has ended) and banks are now demanding additional cash injection from the owner or have the other option to go elsewhere for a mortgage or sell… Also examples of people taking out a mortgage for a new build (which comes with delays) and bank asking for additional deposit (house wasn’t even finished yet!)
Despite all the doom and gloom about mortgage interest rates rising over 2022, there's still a reasonable chance that house prices will continue to increase.
And if some homeowners have to sell up because they can't afford their repayments, that will raise the demand for rental dwellings - putting further upward pressure on rents.
TTP
P.S. Certainly, banks need to increase their term deposit rates.
Yes, and where on Earth do the banks manage to get these hundreds of billions to loan out? By the push of a button! That's the magic of Fractional Reserve Banking. Poof!! It just comes into existence and then they can charge the people for it, in turn driving house prices up and soon we could end up like Ireland just before the 2008 crash. Oh happy days! That's when it's time to buy!
Sounds legit. Westpac wanted me to fill out a brand new application to continue my interest only mortgage for the renters. Said it was due to a law change to protect overleveraged.
Went from 2.29% to 3.69%, extra $300 week in interest payments and only 75% deductible. I'll be doing my part to get CPI down now.
Ummm... Can't say HeavyG is in synch with my own thinking but tell me: why should this person be required to pay back principal on an investment-related loan, compared to an FHB or other owner-occupier?
Surely the whole logic of interest-only lending in all cases is to reduce cash flow risks?
I have 2.5% till mid November this year.
Will play it by ear of course, but at this stage I'd say I will go onto floating after November, the reason being I think the OCR will be cut multiple times from late this year / early next year.
So will look to fix again around April- June 2023 following OCR cuts.
Be careful, as you are literally betting on your ability to forecast future interest rate movements, and moreover your personal forecast is completely against the forecast of all fixed rate markets, in NZ as well as internationally, and also against most central scenario forecasts by many central banks. The overwhelming majority firmly forecasts sustained increased rates. Just look at current swap rates and bond pricing, to realize that your opinion is a real outlier.
Maybe you are privy to information that nobody else in the market is aware of, but your statement does leave the strong impression of wishful thinking.
You are entitled to your opinion. I see a big weakening in the NZ economy this year, and eventually cuts to the OCR.
BTW an international (not local bank with vested interest) economics consultancy is forecasting pretty much the same.
Anyway, I said I am not locked into that mindset and will play it by ear.
Well:
1. It's just my opinion, it might be wrong and I will monitor through the year
2. I don't have much choice as I am locked in till November anyway
3. Although I would rather not, I could fairly comfortably handle a mortgage rate of 5% plus from November, especially as I have a couple of other loans being paid off just before then.
Btw, remember the RBNZ'S mandate is much wider than inflation, it includes employment and financial stability. Both would be threatened by a recession and significant house price falls, and who around here really thinks that the RBNZ doesn't care about house prices?
That's good. If you feel confident in your abilities to take a bit of position against the interest rate market and can afford to be wrong then go for it. But how high could rates go before you cannot afford it? I would recommend maybe refixing an appropriate portion if there is a >5% probability of you being unable to afford those less likely, higher interest rate scenarios.
Yes the RBNZ's mandate is wider than inflation these days (and arguably weighted towards full employment given recent examples) and of course inflation and employment are correlated (albeit in recent decades not as strongly as they used to).
HM, don't let the masses scare you (note the "m" is sometimes silent). I'm with you on interest rates although I think Nov 2022 is probably too early. In August 2021, I fixed for 2 years at 2.49% and 3 years at 2.89%. It was the first time in over a decade that I have fixed longer than 1 year. I'm very happy with that call
Good call there Yvil.
I come off fixed mid November, I'm happy enough to float at 5 - 6% from there then fix again say mid 2023 at say 3.5%-4% once the OCR is back down at around 1%.
If the economy holds up a lot better through this year than I expect, and it seems unlikely that the OCR will drop, then I might fix again for a year from November, but only for a year.
I am pretty comfortable with all this and far from a problematic situation if I end up being wrong.
I think our economy is a credit driven one and I think it will seize up with significantly increasing cost of finance. Increased cost of finance, greater barriers to access it, low/negative net migration, end of covid subsidies... I seem to be in a very small minority who think this, but so be it.
People need to weigh up things and form their own view. I have formed mine but will also monitor things and revise if necessary.
We just sold our first home, knocked us out of a 3.05% for 5 year fix into a 4.95% 5 year fix. Our 3.05% fix was only put in place around 6 months ago.
These are uncertain times, interest rates could go either way. My thinking is if we lock long and interest rates drop, then we will "lose" money that we weren't already seeing. But if we lock short and rates go up further, then we may have to adjust our lifestyle.
The other plan is when rolling off your last low fixed rate is to stay on floating for a while and wait for the dust to settle in 2022.
Because a) the fixed rates on offer atm are not that flash, and b) it’s possible for another decline in rates as events hit and the economy struggles.
Rates go up and down all the time. No one was complaining when they were exposed to lower interest rates and I don't see why should they fear a minute rise close to the long term rate.
Locking into a fixed rate is a cat and mouse game. In locking in your mortgage, you are literally betting on your ability to forecast future interest rate hike- which is no different from futures trading.
However, even if you are right, you won't reap the full benefits as what the banks offer out beyond the 1 year low rates; as those (2 year and beyond) will be priced above what the market thinks that would be as of today.
We've simulated this before, even if you are right most of the time on rising rates over a 25 - 30 year terms, you'll likely to average out the same as just sticking to floating rates. But that's half the story, the bank does not compensate you for the risk of rates falling while you were still locked in; therefore, the risk reward ratio is skewed in favour of the banks you signed up to.
Imagine if you had locked in a 3 year rate in 2019, what a disaster that is.
If your holding period is beyond a few years, I don't see a overly enticing reason to play the futures game with the banks.
That is unless you really think you are that good to beat them.
I think of long fixed mortgages as insurance policies - likely to cost you more but gives you certainty and protection. Useful for people without much buffer.
Regarding your assertion that floating is best - given the strangely high cost of floating mortgages in NZ, I'd be surprised you weren't better off just rolling over ~1-year fixes.
This isn’t true. The banks don’t compete on the floating rate and it is always higher than the fixed rates. Higher when the fixed rates are falling, higher when the fixed rates are rising, and higher when the fixed rates are flat.
Logically it shouldn’t be this way but it is. The floating rates seem just an excuse to milk home owners who want flexibility to pay down their debt faster.
Imagine being recently conned into a million dollar mortgage for a lousy terrace in one of Auckland's future slums.
Mortgage rates hit 6% (it's coming) and suddenly you find that you and the missus are paying $1150 a week in interest dead money to the bank, then principal repayments as the cherry on top.
Then imagine you can't even re-sell it without realising heavy capital losses because the easy credit and supply of fools has dried up and the market is now flooded with the same cookie cutter boxes that failing developers are desperately trying to offload.
Your social media is saturated with all the great times your mates who buggered off overseas are having with their better jobs, cheaper housing and exotic vacations.
Then one of you loses your job or gets knocked up.
Fun times ahead.
Nobody "Just gets knocked up" its called planning Brock and life now requires you to think ahead. Cannot afford to have kids ? don't have any kids its that simple. Interest is not dead money, rent is dead money. With one option you end up with nothing and the other you end up with an asset that has tripled in value, if you cannot tell which is which you need financial help.
"Cannot afford to have kids ? don't have any kids its that simple".
"Just keep looking the other way while we spike property prices by double-digits year-on-year, you focus on dead-ending the country's demographics through increasingly constrained and curtailed reproductive choices".
Frankly this sort of attitude and comment should be considered on the same level as promoting eugenics. It's either insane or just a really crappy troll. Either way, it drags the tone of debate down here hugely and Carlos has form for it.
Hi Carlos69,
I hate to break it to you but both rent money and interest money are as dead as your lineage if you fail to raise a family. But I am heartened to hear that nobody down in ten dollar Tauranga has ever accidently fallen pregnant.
If you believe fairy tales about assets magically tripling in value in perpetuity and have never heard of opportunity cost I suggest that you may want seek financial help.
Sign of a Well balanced society, something to be proud of.
Take away migration and we are a declining population. Things are getting so shite for our 20 somethings that people are actively choosing not to reproduce. Or moving away.
I'm being somewhat cynical of Course. I'm personally proud to be part of team 5 mil. Just about to reinvest some rental returns now...
So an entire generation should not have kids just because a bunch of boomers bid house prices into the stratosphere? (while also driving their new gas guzzlers and trashing the planet as much as possible too).
BTW I own one house which is now "worth" a crazy amount of money and am not a millennial or a boomer, but that doesn't mean I think its right.
Have you seen the price of vehicles from the 1960s and the fuel efficiency of them... what a laugh your statement is and how easy to disprove as the purchases of vehicles by each generation is mostly lower cost (when inflation & maintenance is considered), more modern vehicles than the last generation. This is because time and product development does not stop for everyone just because you think it should. Next you will be complaining the younger generation are not posting letters anymore and they are using mobile phones in their daily lives & say they need them for their work; meanwhile banks and post offices have closed most branches and branch access.
Brock,
I haven't had a loan of any sort for almost 25 years and have a fair amount in TDs, so rising interest rates hold no fears for me. Bring them on. However, i tend to agree with Capital Economics-an international research consultancy- that the RB will end its hiking cycle earlier than financial markets anticipate. Indeed, they see the RB actually cutting rates in 2023.
I think there are growing economic storm clouds on the not so distant horizon. I think we will see this reflected in financial markets which is why i have much more cash than I need. I have gradually reduced my stockmarket exposure from over 60% of the total portfolio to 50% and I will probably go lower still.
Of course, I may be quite wrong.
I believe that his taper tantrum will make all previous look miniscule. The FED will not have the option of cutting rates to restore normality as inflation is now a political priority. The FED are indicating March as the start but I think it may be sooner. This is why I have stepped out of the stock market for now.
They are still 'low' in an historical context, but another +2% coming in the next year or two will put them back to the 6% range and more 'normal' from a longer term perspective.
$1150 pw in interest payments @ 6% on a $1,000,000 mortgage isn't fearmongering. It's just good old-fashioned maths.
"lousy terrace in one of Auckland's future slums."
"Then imagine you can't even re-sell it without realising heavy capital losses because the easy credit and supply of fools has dried up and the market is now flooded with the same cookie cutter boxes that failing developers are desperately trying to offload."
"a very deep hole has been dug."
"Genuine investors went extinct a long time ago."
"Anyone getting in now is gambling"
"Start of the house price correction, possibly crash."
Fear mongering. Tiresome.
The astute investor should be holding at least 3-5% of their portfolio in crypto-assets
Bill Miller has 50% of his personal wealth in Bitcoin. If you're not aware of Bill Miller, he's an investor with a legendary track record and a billionaire.
I'm not recommending people try to be like Bill.
https://finance.yahoo.com/news/billionaire-investor-bill-miller-now-182…
https://twitter.com/LudiMagistR/status/1481706255307751429?s=20
https://twitter.com/invest_answers/status/1482021712606629890?s=20
If you don't have anything up to 6% of your portfolio in Bitcoin, you are literally failing maths and investing.
To be fair 6% is pretty low and the reason why it is only 6% is you can afford to lose the lot. Pretty happy to keep my investment in Bitcoin at 0%. The only possible investing mistake I have made is perhaps not pouring more money into a bigger and more expensive house, the gains have been epic.
Lol. Take a Drive through flat Bush. Papakura etc. Even 10 years old a lot of near new high density housing stock is starting to look real ratty. Plenty of on the cheap townhouses popping up anywhere a mixed residencial site is available. And most of these buildings will not be standing in 100 years time.
100% we are creating squalor. These new zoning laws upcoming will just make it worse.
Plenty of jobs are fairly recession proof. Medical, IT, Food, Transport, Education and many more especially Govt funded. Those around speculative assets and trading in them etc...I agree probably not so much. 1987 was a good example of this with the fallout lasting well into the mid 90s.
So say those that might be affected to the downside.
In reality nothing 'real' has changed - same people, same resources, same house, same everything. Its only those little screen digits that have moved.
The fear of the banksters + is the change in direction of wealth flow.
No necessarily. A 40% reduction would only affect people who bought in the last 3 years. And only then if you are leveraged.
Employment remains high and banks in nz are well regulated.
Life will go on.
Unless we run out of energy sources in which case we are buggered.
"though it won't be anything like the numbers mentioned" - is that because the "experts" in the media aren't picking it?
House prices went up massively due to low interest rates and lack of supply, so why shouldn't we expect the opposite with higher interest rates and increased supply?
The economy needs general price stability. This is enshrined into law in the Reserve Bank of New Zealand Act 1989. The reserve bank is required, by law, to take all actions necessary to control general price inflation.
The wheels "falling off" is simply the desired cooling of the economy. Adrian Orr has stated as bluntly as he can, several times, that asset prices are not in his mandate.
It's not the only threat though. People have target fixation issues when it comes inflation, when it's quite likely people will simply spend less. The cascade effect of already-suffering businesses (think hospo, events) would mean even even less spending.
We are primed for a high cost, low wage, high price, low spend economy, and that feedback loop will be very very difficult to get ourselves out of.
The Fed was expected to rise 3 times this year, then 4, then X.....
If the FED rises 1, NZ rises 1.5.
If I had an investment property today, it would be for sale tomorrow.
https://www.cnbc.com/2022/01/10/goldman-predicts-the-fed-while-hike-rat…
Rising headwinds on holding debt and not just in NZ are building fast. The US and China have announced rate increases, and more normal lending standard to try and control roaring inflation. Both have their own significant bubbles to deal with as well.
Not wanting to sound DGM but the whole thing appears not unlike a giant game of Jenga. That said, high equity entites that still have a decent grip on the word "yield" and steady incomes will not be feeling stress. If anything they will be happy that the speculative malinvestment models of the last ten years may finally be approaching a margin call.
Will be interesting to see what transpires in the next 12 months and if there is a tipping point what it will be.
But in turn, that will be $800 mln that will not be spent in the wider economy
All groups are forecasting that the increases to interest rates will serve to slow down or revert house price rises a little, which I think nicely negates some of that $800 mln lost impetus.
Guessing at some of the numbers involved, if the average house price were to rise another $100,000 this year, that is $20,000 more deposit required by all FHB (every year). If we imagine 10,000 households saving to become FHB then that is $200 mln they are unable to spend in the wider economy (spent only into the black hole of RE and property speculators).
That will be $800 mln that will not be spent in the wider economy. Although annual retail sales exceed $107 bln, taking 0.75% off the top of that will be noticed.
I also thought higher interest rates would make a significant dent into discretionary spending but $800 million is only 0.7% of $107 billion. So you're saying that a 0.75% rise in the OCR reduces retail spending by less than 1%, that seems a very low reduction and I doubt that "That will be noticed" very much at all.
Banks test rate (6 or 7% or whatever) is still way above current interest rates. It seems wildly speculative to talk about borrowers struggling to make mortgage payments at what are historically very low rates. RBNZ have huge scope to start to get a grip on inflation now without any real risk of negative consequences.
The biggest risk now is that they lose control if, in the couple of months it'll take us to get through Omicron, there is a cost-push factor as business have staff off with flu. We're heading into this from an already elevated level of inflation that must not be allowed to surge further.
The risk is far less about existing mortgage holders struggling with much higher mortgage rates, and far more about killing demand for both existing and new housing moving forward.
Having said that, while many mortgage holders will cope ok, it's likely to put a dent in discretionary spending. The strength of hospo, retail and tourism is already fragile...
Yeah so do I but once you have paid off that mortgage and have a decent amount in the bank you simply don't care about returns. A few hundred bucks gets thrown into your account every month and its a nice surprise. Rates are on the rise and if they ever get back to the historic average, then sure it would be nice for savers who have toiled away to get there.
I knew mortgage rates were going to rise last year, but the bank wouldn't let me refix the rate until 60 days before the current fixed rate finished, which is end of January, meaning I missed the opportunity for a lower rate and had to settle for a 4.99%, discounted at my request to 4.89%, fixed for 5 years.
I chose a 5 year rate, as the variation between the 1 year and 5 year is only 1.34%, the RB is indicating increases to the OCR, and the main banks bumped their rates very quickly after the last increase in November, so I suspect 1 year rates to be > 4% pretty soon, and > 5% by years end.
If not, it doesn't really matter, as a fixed rate just gives me certainty with repayments over the floating rate.
Yup it's that certainty. Personally I'd rather be fixed long and see rates drop slightly than be fixed short and come out with rates higher.
It's the difference between missing out on extra money that you weren't seeing anyway and forgoing extra money you originally had budgeted elsewhere.
I could have but I was on 2.09% fixed at the time and the break fees would have sucked up the savings I had made over the year, and probably over the next couple of years since the rate I would have got was only 20 bps lower. Plus, it's a pain going through that process when the banks only want to do business via scheduled phone calls nowadays.
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