Even relatively slight increases in mortgage interest rates could present significant challenges for the housing market

Even relatively slight increases in mortgage interest rates could present significant challenges for the housing market

The prospect of rising interest rates is like a desert mirage.

No sooner do they appear to be just over the hill than they disappear back over the horizon as interest rates continue to tumble to ever greater lows.

Good news for home buyers, not so good for savers.

However, one thing that could change that is the Reserve Bank’s proposal to require the big four Australian-owned banks to increase their capital.

Some commentators have suggested this could add an extra 1% (100 basis points) to the banks’ mortgage interest rates, which could take two year fixed mortgage rates that are currently around 3.99% to just under 5%.

There may me a bit of scaremongering in those predictions, however, even those who are in favour of the bank capital proposals concede they would put upward pressure on mortgage interest rates, it’s just a question of how much.

But regardless of the cause, if/when interest rates do rise again, how much of a stretch would it be for existing mortgage holders to make the higher payments?

The table below shows how much the fortnightly payments would be on mortgages ranging in size from $100,000 to $1 million, at the current rate of 3.99%, and what the payments would be if mortgage rates increased to 4.49%, 4.99% and 5.99%.

Such rates are likely at some stage even if the Reserve Bank doesn’t proceed with its bank capital proposals.

It was only in May last year when two year fixed rates were around 4.49% and September 2015 when they were around 4.99% and November 2014 when they were at 5.99%.

If rates rose from the current 3.99% to 4.49% it would increase typical mortgage payments by around 6.1%, if they rose to 4.99% mortgage payments would go up by about 12.5% and if they went to 5.99% mortgage payments would be upped by 25.6%.

The table below sets out what that would mean in dollar terms.

If someone had a $300,000 mortgage, the payments would be $660 a week (for a 30 year term with a minimum 20% deposit) at the current rate of 3.99%..

If mortgage rates increased to 4.49% those payments would go up to $700 a fortnight and at 5.99% that would be $829 a fortnight.

The extra money the home owner would need to find to make the higher mortgage payments would be between $40 and $169 a fortnight.

If the mortgage was $500,000, payments would increase by between $67 and $281 a fortnight.

However, the pain wouldn’t be restricted to people with an existing mortgage.

It would also affect those looking to take out a mortgage, particularly aspiring first home buyers.

Although the Reserve Bank does not impose maximum Debt-to-Income (DTI) Ratios on the banks, the banks have their own DTIs, which are included in their calculations for deciding how much they are prepared to lend individual borrowers.

So if rising interest rates started pushing up mortgage payments, it would inevitably start to reduce the amount banks would be prepared to lend individual borrowers

And if buyers couldn’t borrow as much, they almost certainly couldn’t pay as much and, all other things being equal, that would eventually put downward pressure on house prices.

Of course if property prices started falling, it wouldn’t just affect the ones that were on the market at the time.

It would likely reduce the value of all homes, which in turn would reduce their owners’ equity, which in turn would reduce the amount they could borrow in future.

It would also reduce the value of the security held by the banks over their mortgage book, which could start to reduce the overall amount the banks would be prepared to lend.

So regardless of their cause, rising interest rates present challenges for the property market.

The severity of those challenges will depend on the strength and speed of the rises.

But for the time being at least, they are but a distant cloud on the horizon.

The comment stream on this story is now closed.

The Effect of Higher Interest Rates on Mortgage Payments
  Fortnightly Mortgage Payments* $
Amount of Mortgage $ Interest rate 3.99% Interest rate 4.49% Interest rate 4.99% Interest rate 5.99%
100,000 220 233 247 276
200,000 440 467 495 553
300,000 660 700 742 829
400,000 880 934 989 1105
500,000 1100 1167 1237 1381
600,000 1320 1401 1484 1658
700,000 1540 1634 1732 1934
800,000 1760 1868 1979 2210
900,000 1980 2101 2226 2487
1,000,000 2200 2335 2474 2763
*Assumes a 30 year term and minimum 20% deposit

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13
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A timely article to remind those with large mortgages to start paying down the principal as quickly as possible while interest rates remain low. If they cant afford or discipline themselves to pay an extra $137 a fortnight in paying down their $500,000 mortgage now, then they are not going to be able to pay that extra 1% interest rate increase.
A couple of points regarding money management:
- Those who were extended and needed to take out interest only mortgages need to start urgently paying down debt now. With reducing mortgage interest rates they are probably currently feeling greatly relieved and potentially can do this; however, not to do so mean that they are potentially sitting of a growing ticking time bomb.
- We have probably lost sight that paying the mortgage down - after clearing credit cards - is arguably probably one of the best forms of saving with best return, "tax free", and no risk. Generally, principal paid down is accessible in the form of an overdraft facility; although this may be at a higher rate, it is one the cheaper forms of credit and can be quickly paid off. KiwiSaver probably remains the best saving option but funds are not accessible until 65.

"start paying down the principal as quickly as possible" I'd do the same... However, on a larger scale, this is the thing that truly crashes the economy fast as people stop spending... Its been happening before - this is what has caused significant issues throughout the GFC... Catch 22?

"while"? why should interest rates ever go up? If they do its because our and the global economy have recovered and are seeing a boom period, I give that a zero % chance myself. In fact I expect a 2nd Greater Depression.

Excellent point!

So i guess you went to the comments without reading the article? It would be naive to think that doubling the capital a bank needs to hold will not flow down to interest rate pressure.

but which way.. higher interest rates for borrowers? OR lower interest rates for depositors? At the moment is seems to be depositors that are going to get hammered. I wonder how low the term deposit rates get before people decide the OBR risk isn't worth it. And going by the LGFA bond demand and coupon.. its a lot further.

Orr said the OCR would be used to mitigate impact to borrowers and competition would be expected to mitigate most of the pass through any way. He leveled a barley veiled threat that failure for the banks to absorb some of the cost would be viewed as evidence of anti-competitive behavior. The article amounts to click bait.

Good point Pragmatist

Printer8, agree with you sentiments. But stop saying 'tax free' in earshot of the Deemed RoR brigade. Fires them up....

Realistically, 4.99 and 5.99 are still such low rates if viewed over the long term. That home owners are already so stretched, and such small increases could have such large effects, is terrifying. But that's what happens when home values are so insanely high.

When the US market tanked during the GFC, it was rates in large part that did it. The interesting difference is that over there you can fix your rate for 30 years. Imagine that. A 30 year fixed rate widely available and yet so many borrowers took the punt on a temporary lower rate (because worst case scenario, of course you'd just sell if the rates jump. Unless you can't) that the house of cards fell. And home values (and hence mortgage balances) in the worst hit states like Arizona, Florida, Nevada and California were far lower than here, with the ratio to income far more attractive.

Those with 10% down on their $1m+ McMansions on the fringes of Auckland face tough times ahead.

From the morning report: In the US, here is something 'new' - a Fed official saying that there will be at least one rate hike in 2019 and another next year. It seemed that recent events had taken these off the table, but apparently it is not so.
The 30 year downward trend of interest rates has been broken out off last year - now its finding nice support above the downward trendline for it to higher if support holds. If it doesnt - false break out - expect rates to plummet... So far, so good

There are always those people who get themselves donkey-deep in debt - and don’t have the means (or wherewithal) to save themselves when things get tougher.

But I’d wager that a large majority of people have enough acumen/wisdom to know that today’s low interest rates won’t last forever - and factor that into their consumption & investment decision-making.

Nonetheless, if some people go to the wall, then that’s a standard market response - as unfortunate as that may seem.

Nothing new.

TTP

Yes, I’d certainly hope that most people factor in the historical average of interest rates, rather than the historically low rates plus a bit more, but unfortunately I think that your “some people” figure may be way too high. Remember that those who are around 30 years of age have not known “normal” rates in their adult lives. We’re still at what used to be called emergency, crisis rates levels.

I’m 30 and that is definitely true. Maybe it’s also coloured my opinion that rates won’t rise because they can’t. The way we run our money system, downward rates are the only (temporarily) sustainable way to go. I don’t think we’ll see “normal” rates until after a genuine crash. Welcome to the new normal maybe.

Being a couple of decades older, and having a keen interest in reading about the history of markets and speculation, I’ve heard and read so many times of people, even esteemed economists, pronouncing “the new normal”, usually quite shortly before that new normal gets turned upside down. A couple of example were the “new economy” (Dot Com Bubble), The Great Moderation (before the GFC), similar before the 1929 crash, and many, many more in history going back centuries. Speculation and crashes occur, that’s a certainty along the way. I think NZ and Australia have been in housing bubbles for a while. Remember the pronouncement of the “rockstar economy”? That’s built on a speculative housing bubble.

It seems we agree that rates will stay low until a crash then. Only issue is governments and central banks are intervening more and more around the world to keep things propped up and in my book, they have been surprisingly successful. If they don’t allow a reset then low rates could well be the new normal (look at Japan).

Japan had a massive property and stock market bubble (in the 80s) and bust which led to their situation, but yes I think we could be heading for similar to their 2 “lost decades” after this, with no to not much growth in property values. Their immigration and age demographics are quite different though. Even now they have empty houses going very cheap.

Well said Whitay

Emergency is the new normal.

When do we upgrade to panic?

History shows there's a lot of people who lack commonsense/wisdom. It's called natural selection.

This is where "common sense" isnt, its a classic failure. You are assuming expotential go for ever growth on a finite planet, that IMHO just ended in 2007/8 its never coming back.

Second when enough ppl go to the wall the leverage sends our banks bankrupt and the OBR kicks in confiscating large %s of the saved's capital making it a double whammy.

New, its very new and most dont even see it yet, IMHO.

I don't think common sense is common.

I think Fear and Greed is more common.

Barfoots, new listings over past 6 months 7468, sales 4165. Yet stock on hand at 4684 is lower now than 6 months ago.

Indeed Cowpat, the withdrawal rates are quite high at present. Some sellers still think it will get better if they wait! It’s like those that hold stocks purchased at the top of the market. The first 10% drop is palatable. Denial - ‘It’ll bounce back’. Then 10% turns to 20-30% as some sellers wake up to the ‘new reality’

Hi Cowpat,

A number of people here are keen to dismiss Barfoots - but equally keen to quote the company when it suits them.........

I find this quite amusing.

TTP

But my favourite toothypointy, Barfoots is significantly the largest agency within Auckland, why would one not use its hard data. It would be foolish not too. The RBNZ also provides a wonderful series of mortgage data which gives insight on a regional basis. Thankfully cowpat finds little need for a suit, I have found they are generally worn by insecure and somewhat frustrated males.

Hi Cowpat,

I have no interest in what clothes you might choose to wear......

I merely note the marked propensity of certain people here to run with the foxes and hunt with the hounds.

TTP

Toothy, how were Barfoots auction rooms last week , I believe those attending the Bruce Mason centre were overcome, apparently trapped by hounds.

Hi Cowpat,

When you’re in a hole, it’s a good idea to quit digging.

TTP

“Hello kettle, you’re black” - Pot

Burn!

11
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During the heady days, not long ago we could sell Auckland , at least the housing stock at a remarkable rate approaching every 11 years. Currently on six month rolling basis it would now take 29 years. Do not expect price rises.
Using the very simple median pricing , with all its flaws, and all the other factors aside, Auckland homes purchased from June 2016 , about 70000, or around 11 percent of stock, if sold today would reap a loss.
If interest rates rose there would be only one outcome.

“Do not expect price rises.”

That’s what a lot of people were saying 50 years ago; and 20 years ago; and 10 years ago; and 5 years ago.

I can’t tell you when the next property bull-run will commence........ But as sure as night follows day, it will happen.

TTP

10
up

"Do not expect price rises" until after the crash ... that is currently underway this year.

That is what you said at breakfast this morning Dad.

Then when I was getting ready for school, you also said that house price crashes are not like equity crashes, and can run over a period of years.

SOAP

Ha-ha-ha-ha :) Well said Son!

The black cloud of RBNZ rules could also constrain the big banks NOT to further gouge the customers but to make up their capital from earlier profits or sell up and leave.

Even at a 2% increase in rates, for the amount I'd have to borrow the difference in repayments vs. what I currently pay in rent is marginal... I suspect there'll be another great flight of the youth across the ditch if things don't start to look up for non-occupiers soon.

An extra $50 odd per fortnight per $100,000 principal doesn't sound too bad, until you consider the average first home buyer is taking out a mortgage of $400,000:

https://www.nzherald.co.nz/personal-finance/news/article.cfm?c_id=12&obj...

I have seen so many in their 30s indulging on latest iPhone, new Mazda 3, VW Golf, overseas trips, etc on their revolving mortgage account. Perhaps I am a bit too old to keep up with the new thinking!

Do you know these 30 year olds or are you just playing at the incessant bull shit stereotyping of Millenials?

I'm in my 30's (as are many of my friends), those very few who do rock around in the latest cars and overseas trips are the well off ones who certainly don't throw it on the mortgage. The latest Iphones are often company phones (including mine) or they have enough disposable income to buy the latest gadgets.

Unfortunately, I do work with quite a few of them, some were my ex staff members. I constantly get their social media feeds on the latest wares they acquired!

Smashed Avos on Toast 'n all!

Are you crazy? No-one can afford avos at the moment. Not even cashed up millennials living high on revolving credit!

The Avo is a stronger currency than the South Pacific peso

I think what is neglected in these situations is the flow on of family wealth that these people have acquired, if from the right family.

Its not uncommon for them to get a six figure contribution from their parents towards a house, which acts as a house deposit. For those that saved for a deposit themselves this contribution from their parents either means they go stupid and buy a more expensive house (and a bigger mortgage), or end up purchasing a regular house with a 30-40% deposit.

I have mates that regularly travel overseas, have nice clothes and cars and most times its due to a combination of being from the right family and them being very practical. Good on them I say.

I'm sure many older folk have been indulging in a new car, boat or holiday on the house too.

We should ban avocados, given their role in causing the housing crisis.

I recommend purchasing an older car - such as a British classic from the 1960's/1970's.

Many people adore such vehicles: they bring smiles to our faces. (Think of the humble Morris Minor and Riley Elf.)

Good ones can be bought for $5,000 - $10,000. If well maintained, they tend to appreciate in value - some by remarkable amounts.

New Japanese and Korean cars tend to depreciate rapidly. German and French cars are even worse.

TTP

Buy a British famous Leyland P76, they are excellent for garden bed to grow your favourite vegetables.

"New Japanese and Korean cars tend to depreciate rapidly" have a quick look how much a mint Mazda RX2 or RX3 goes these day.. A nice 6 figures sum

Hi Chairman Moa,

I hasten to correct you.......

The Leyland P76 was an AUSTRALIAN designed and manufactured vehicle, introduced to compete with the Ford Falcon/Fairmont and the Holden Belmont/Kingswood/Premier of that era [mid 1970s]. The Leyland P76 was certainly NOT British.

Yes, I agree with you: Mazda RX2 and RX3 have been fetching stellar prices but they are now decades old - and NOT new cars!

Note that an acquaintance of mine bought a new "Mazda 6" twelve months ago. He laments that its value has dropped 40% in that time. So much for new Japanese family sedans....... Better to put your moolah in property.

Get yourself a 1969 Hillman Hunter and impress your neighbours!

TTP

TTP,
Q: What do they call Austin Princess with sunroof?
A: Skip bin.

Hilman Hunter.. well designed British product with hand brake on right hand side by the seat.. Now try to change gear and do hill start at the same time. Brilliant those British.
My fav is an old Peugeot 504..

And then there were the Hillman (L)imp, the Morris (P)oxford, the Ford (Gr)otina, the Ford (D)efect and the Ford (Angle)box........ the latter with four-on-the-floor, two in the glovebox and one in the boot.

My, those were the days that we now lust after.

TTP

Good thing when you buy an old British car is that you also get yourself a hobby in car maintenance. And if it's a British convertible, in the use of Selley's No More Gaps.

Or be smart and buy an EV, no gas costs, minimal costs to run, and help reduce global emissions too. Just sayin'

Yes, yes.. I am here in Aust. I recently bought a 5KW solar for under 4.5K - after my own usage during the day, I am exporting roughly 15KW daily back to the grid. Now if I can lay my hand on a EV vehicle and charge it during the day.

.

6% rates should not be a problem for most people, they will just have to stop wasting money on cars and overseas holidays every year and pay off the mortgage instead. The lowest mortgage rate I ever had was 6.4%, for most of my term it was 8.6%. What frightens me is how common it is for people to have pretty much the same mortgage as they took out 20 years ago as they are simply not repaying it in the hope their house price keeps doubling every 10 years.

The only way to keep house prices up is immigration & that's the current setting. Our birth rates are abysmal, especially among the educated classes & this is standard fare for most western cultures. Winnie & Labour both campaigned to reduce it but the reality is, if it stopped or was lowered significantly then house prices would really be in trouble. Another case of Labour being totally ignorant of the reality prior to the last election after 9 years in opposition.... doing nothing. Since then a rabble of committees for the faithful few trying to reinvent socialism for the new millennium, which will continue until the end of 2020. Really?
Stephen Fry said last year on BBC television in a debate about left-right politics. "It's not the Right that have let us down globally, it's the Left." Even he knows it.

Not savers, the saved.

1) The timing of this article is a bit odd given that just last week Westpac joined other banks in very significantly lowering interest rates for long terms (4 & 5 years), thus giving certainty of longer rates for longer.

2) The capital requirements will likely increase rates but the consensus is by about 0.4%

3) If interest rates were to increase by 2% or more (and they're not in any foreseeable future as you can lock in 5 years fixed at 4.39%) NZ would head into recession because a lot of money that is currently spent into discretionary items will be redirected to interest payments leading to many businesses suffering, leading to some businesses closing down, leading to employees losing their job, meaning they will spend even less… a downward spiral.
If interest rates were to to increase by 2% or more, then I would join the ranks of those who believe that the real estate market will depreciate significantly in value, possibly 20% +

not going to happen nothing to see here
the days of high interest are long over with the debt creation that created the world debt mountain
we will have long interest rates for a long long time as well as QE in many forms
to help people service the debt, otherwise we would have a GFC2 and it would make the last look like a blip

Indeed, especially "we will have long interest rates for a long long time" ; )

If you can get rid of of all your debt (or reduce as much as possible) just do it ! The big 4 banks and all their "hangers on" have had it SO GOOD for SO LONG ! ...time for a change and to get out of this "casino" economy based on residential housing stock ! Let the banks earn their money through investing in R&D, new ventures, new or expanding businesses etc etc ...not through salary and wage earners pay packets ! What makes this even worse is that you go out there and run your business like a bank - you would be charged with "money printing"ie forgery !!! .....always remember the bank is NOT your friend.

People are not paying down their debt and that is the problem. Have you taken a look at what is driving around on our Auckland roads these days ? people are still using their house as an ATM to finance new cars and overseas holidays. Banks are great, borrowing money and buying a house in this country is the way to make money, the secret is pay off the debt as fast as possible, not in 35 years but in 15-20 years.

What about those of us who have new cars and also managed to pay down most of the mortgage?

Not everyone is up to their eyeballs.

Banks stress at 7.5% anyway to check affordability even if the actual rate is 4%.

If we have a crash, and the reserve banks around the world do the same thing they did last time, then:

1) The banks would be bailed out.
2) Interest rates would go to 0 in NZ. Overseas they have no wiggle room... maybe go negative?
3) So savers punished, borrowers rewarded.

So load up load up that debt :)

I agree Davo36, the banks don't seem to be interested in offering me anything but the carded rates on term deposits. I had to shift a large amount of money from one bank to the next to get another 0.2% at the time. Sure not a big difference you may say but its the principal of it. I would have thought with the changes coming up they would be looking after their clients and trying to retain savers.

The RBNZ changes to capital requirements are unlikely to have a huge impact on rates - NZ owned banks that don't use internal models won't be hugely impacted, and will limit the scope of the big four to pass on rate cgabges.

What is far more likely is that the Big Four will reign in the amount of credit they are willing to issue. The use of internal models makes it profitable to issue credit to marginal buyers ... standard models will require significantly more capital for these same borrowers. It will start at the fringes and highly leveraged investors and FHB's with low equity will find it increasingly difficult to obtain credit.

Just as it occurred in Australia the availability of credit will be the primary cause of price falls over the next couple of years.

Miguel the problem with your assumption is that the “NZ banks” dont have the capital to take out other than a small portion of the big banks lending i.e. they are minnows in the market. And any chance that someone like the Superfund or others would put more capital into the likes of Kiwibank will be gone with the low returns that the new proposed RBNZ capital requirements will create. The capital issue is a major issue for both borrowers, and depositors and bank shareholders if it comes in as proposed - dont be fooled by the uninformed comments here and elsewhere.

Banker Gangsters