Banks say many of their borrowers are ahead of schedule on home loan repayments but tougher times are ahead

As mortgage rates sank to record lows during 2020 and 2021 banks battled to keep up with borrower demand. In February 2021 ANZ Banking Group CEO Shayne Elliott remarked that record volumes in ANZ's New Zealand home loans business meant staff were "really run off our feet in terms of supporting Kiwis into homes."

It's no wonder bank staff were busy. During those heady days monthly mortgage volumes were going through the roof, peaking at $10.487 billion worth of new lending in March 2021, according to Reserve Bank data.

Real Estate Institute of New Zealand (REINZ) figures show national median prices peaked at $925,000 in November 2021, when the median number of days to sell was 29. 

Now, 18 months later the picture looks very different. The latest REINZ figures show median prices down $150,000, or 16%, to $775,000, and the median number of days to sell has pushed out to 45. The latest Reserve Bank residential mortgage borrowing figures show $3.836 billion worth of new lending during February, well down from the heights of 2020-2021.

Those 18 months, of course, have seen inflation surge to its highest level since 1990, reaching 7.3% before reducing to 6.7% in the latest Statistics NZ quarterly figures. The Reserve Bank, tasked with keeping inflation between 1% and 3%, has responded by pushing NZ's benchmark interest rate, its Official Cash Rate, up 500 basis points to 5.25%. 

Against that backdrop mortgage interest rates have jumped. The average popular two-year fixed bank rate, for example, bottomed out at 2.524% in June 2021, and is now at 6.497%. 

However, as times have got tougher there've been few mortgagee sales so far. Mortgagee sales are when a borrower can't pay back money they owe their bank and the bank sells the property to get back what it's owed. At the start of this week, there were 37 properties being advertised as residential mortgagee sales nationwide. During 2009, during the Global Financial Crisis, there were 3,024 mortgagee sales.

So just how are borrowers coping with those significantly higher interest rates? Not too badly, according to their lenders. Albeit, given the NZ penchant for fixed-term mortgages, some of us are yet to feel the full impact of significantly higher mortgage rates. 

A third of ANZ borrowers ahead on their mortgages by at least six months

An ANZ NZ spokeswoman told interest.co.nz about 35% of ANZ's customers are on an interest rate lower than 4%.

"However, we know that many of our customers will roll off fixed home loans onto higher rates over the coming year. When that happens some will be under financial pressure," she said.

Nonetheless at this stage the spokeswoman for the country's biggest bank says about 33% of accounts are ahead on their home loan repayments by six months or more.

"At the moment, the vast majority of our customers are in a sound financial position. People have kept up their savings habits and many took the opportunity while interest rates were low to pay down debt, so are ahead on their mortgages," the ANZ spokeswoman said.

But, if things get more difficult the spokeswoman says finances can be restructured, including by "extending their home loan term or moving part of their loan to interest only."

A longer home loan term or paying interest but not loan principal, could mean borrowers ultimately pay more.

More than two-thirds of Westpac customers ahead on repayments

In comments attributed to Mike Norfolk, its General Manager of Consumer Banking and Wealth, Westpac NZ said at March 31, 67.7% of its home loan customers were ahead on their mortgage repayments. That's down slightly from 68.4% a year earlier.

"Those customers were ahead of their scheduled mortgage repayments by a median amount of $12,480 or 10.8 months. Our home lending team has not seen an increase in applications for interest-only lending or extensions of mortgage terms," Norfolk said.

In comments attributed to Nicole Pervan, its General Manager for Home Lending, Kiwibank said a significant number of home loan customers took advantage of the low interest rate climate to accelerate home loan repayments.

"From about 2012 to 2020/21 we had customers who kept their payments the same, or even increased payments, despite interest rates falling, in order to reduce the length of their mortgage...Our figures indicate just over half of our entire book, which is around 170,000 accounts, were choosing to pay off their mortgages faster," Pervan said.

"Even over the past year as customers have been rolling off historic low rates onto higher interest rates, the majority of our customers are still choosing to pay above their required repayments where they can. We do expect this to decrease over the next few months as more of those low home loans interest rates reset onto the higher current rates as that will be higher than some of these customers have been paying previously."

Pervan said Kiwibank saw "a good proportion" of customers reduce 25 year mortgages down to 20 or 17 years by aggressively paying down their loans in the previous low interest rate environment. Now she says about 1% of customers have switched to paying interest-only "temporarily" due to increased interest rates.

"We are also seeing some households, a smaller number, who were managing to increase payments and shorten the length of the mortgage, request to go back to the original length of the loan in order to reduce repayments further," said Pervan.

"So far, we have seen most households able to adjust payments to meet the new repayment rates and still stay on track to repay their loans as scheduled, but we are getting more feedback indicating how challenging that will be given other cost increases they are facing currently."

Increased hardship

Pervan said Kiwibank's also seeing an increase in customer hardship through a change of circumstance.

"This could be a loss of job, a significant health event, or a marital separation. These figures have increased threefold, from a previously very low level of roughly 0.02% prior to the pandemic. We think this is probably people emerging from the trauma of the last few years, experiencing big life events and having to adjust their financial circumstance accordingly."

Bank staff are also keeping a close eye on customers whose interest rates haven’t changed yet, but are due for a reset and who are already struggling or are in arrears either with Kiwibank or other lenders.

Mark Wilkshire, CEO of The Co-operative Bank, told interest.co.nz nearly one third of the bank's customers are paying above their minimum payment. 

"That has only marginally changed since rates began rising in October 2021, with 36% paying above the minimum then, to 31% today, dropping just 5%. Customers are therefore choosing to still keep their repayments above their minimum which helps reduce their total interest cost and must be cutting back in other areas of spending," said Wilkshire.  

"Customers who have been paying above their minimum have bought themselves flexibility as rates rise, as they can more easily adjust their loan term. That is a useful option to have in their back pocket."

The Co-operative Bank isn't seeing an increase in interest-only borrowers, which comprise less than 5% of its total. 

"We also continue to see people keep up to date with their repayments which is the benefit of testing people at higher rates. Even when the Official Cash Rate was 0.25% we tested people on rates above 6%, which is around where our popular one or two year fixed rates are now," Wilkshire said.

As interest.co.nz recently reported, the major banks' mortgage serviceability test rates for wannabe borrowers now start at 8.5%.

"Coming up in the next six months based on what we know today, over 80% of customers could expect an increase in their minimum fixed mortgage repayments of between 1% to 25%...For The Co-operative Bank one of our top priorities is helping customers adjust to the higher rate environment," said Wilkshire.

'A challenging year for many'

A BNZ spokesman said the bank hasn't seen any material change in the way customers structure their repayments.

"The impact of additional repayments on the life of a home loan depends on each customer's unique circumstances, such as the size of their loan, the term length, interest rate, loan structure, and frequency of additional payments. For customers in a position to do so, making extra repayments, whether through small regular payments or one-off lump sums, can significantly reduce the interest paid over the life of a home loan and help them become mortgage-free sooner," the BNZ spokesman said.

"We have seen a small increase in customers requesting to temporarily switch their home loan to interest-only, including customers affected by Cyclone Gabrielle and the Anniversary Weekend floods in Auckland."

Meanwhile, an ASB spokeswoman said the bank's not seeing an overall increase in customers moving to interest-only payments, but acknowledges this will be a challenging year for many home loan customers.

"For many Kiwis it will be the first time they’ve experienced the impact of interest rate increases and we are proactively reaching out to customers we believe may face financial challenges to help them understand the options available to them," the ASB spokeswoman said.

In February the Reserve Bank suggested mortgage holders on average could be paying about 22% of their disposable income to service the interest payments on their mortgages by the end of this year.

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