More than 24,000 households are likely facing a significant level of mortgage stress, with their mortgage payments increasing by an average of almost $250 a week due to higher interest rates.
While anyone with a mortgage will have been affected by the higher prevailing interest costs of the last few years, the most affected will be those who took out their mortgage between May 2020 and August 2021, when mortgage interest rates dropped below 3%.
Over that period the average of the two year fixed rates offered by the main banks ranged from 2.52% to 2.88%.
That also covers the period from 1 May 2020 to 1 March 2021 when the Reserve Bank removed loan-to-value ratio (LVR) restrictions on mortgage lending.
This was a period of very easy money, and according to the Reserve Bank, 397,564 mortgages were approved between May 2020 and August 2021.
While it’s likely that almost all of these people will have faced significantly increased mortgage payments when they re-fixed their mortgages, those who have faced the biggest challenge will likely be people who purchased their property with a low equity loan with less than a 20% deposit.
According to Reserve Bank figures, 24,244 low equity mortgages were approved between May 2020 and August 2021, with an average value of $490,761.
Of the 24,244 low equity mortgages approved during that period, almost two thirds (65.4%) were to first home buyers.
The average two year fixed rate at the mid-point of that period was 2.58%. On the average mortgage size of $490,761, that would give average mortgage payments of $526 a week.
Increasing the average mortgage rate to 6%, the average two year fixed rate in August this year, would lift the weekly mortgage payments to $769 a week. That means many of those borrowers could be looking at having to find an extra $242 a week to service their mortgage.
Offsetting that, wage growth has also been quite strong over this period, according to Statistics NZ, with median earnings for a couple from wages and salaries rising from $2136 a week in June 2020 to $2540 a week in June 2023, up by $404 a week (pre-tax).
Once tax was taken out of that its likely that most of the growth in earnings would have been eaten up by the higher mortgage payments, leaving higher living costs, covering everything from rates, insurance, food, transport and clothing, to property maintenance and other household expenses, to be squeezed out of the remaining income.
On top of that, the homes of many of those borrowers could be worth less now than they were when they purchased them, potentially pushing them into negative equity.
Between May 2020 and August 2021 the Real Estate Institute of New Zealand’s lower quartile selling price ranged from $446,000 to $619,000. In August this year it was just $577,500, which is well below where it was from March 2021 onwards.
The REINZ’s median price has plotted a similar course, ranging from $620,000 in May 2020 to $850,000 in August 2021. It was only $765,000 in August this year.
Those figures suggest perhaps around of the third of the low equity borrowers during the period when mortgage rates were below 3% could have seen the value of their homes decline from what they were worth when they purchased them.
Although the situation and degree of difficulty individual borrowers are in will vary, it is likely most of the 24,244 low equity borrowers who took out mortgages while interest rates were below 3% are now facing considerable financial stress.
And their numbers may even be higher than that, because the rush of low equity mortgage lending continued for another four months after interest rates began rising above 3%, taking the total number of low equity borrowers who are most at risk to just under 29,000.
And of course that’s almost 29,000 households, not just individuals, who are likely finding things very hard going at the moment.
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