The impact of rising mortgage rates is yet to be widely felt across the economy.

While some mortgage holders will already be feeling the pinch from the Reserve Bank of New Zealand (RBNZ) lifting the Official Cash Rate (OCR) from the emergency lows it was cut to in 2020 and 2021, a large portion are yet to refix their mortgages at higher rates.

Over half the country’s stock of fixed-rate mortgage lending is due for refixing this year, according to the RBNZ.

Because the average rate across this stock of lending remains relatively low, the full effect of rising rates is yet to be felt.

The RBNZ’s latest available data shows the average mortgage rate across the country’s stock of fixed lending was only 3 per cent at the end of March.

This was well below the 4-5 per cent mortgage holders were fixing at, at the time, reflecting the fact it takes time for OCR changes to filter through the economy. Mortgage rates have since risen.

So, while OCR and retail mortgage rate hikes are making headlines now, it will take some time for them to cool the economy more generally.

RBNZ Governor Adrian Orr last week told Parliament’s Finance and Expenditure Committee it takes between 18 months and “two-plus years” for the central bank’s monetary policy decisions to fully take effect.

He noted the RBNZ won’t be able to get on top of high inflation overnight.

Nonetheless, Kiwibank chief economist Jarrod Kerr believed the relatively aggressive approach the RBNZ is taking towards trying to curb inflation will see it dampen the economy relatively quickly by historic standards.

The OCR rose from 0.25 per cent to 1.5 per cent in the six months to April, and is expected to be lifted to 2 per cent when it’s next reviewed on May 25.

The cooling effect will be particularly acute as a number of mortgage holders fixed at shorter terms in 2020 and 2021. Kerr said there is now a shift towards mortgage holders fixing at longer terms.

Furthermore, mortgage holders are particularly sensitive to interest rate changes because of the sheer size of the country’s mortgage debt.

At $335 billion at the end of March, the value of the country’s mortgage debt was only slightly less than the value of the country’s entire economy, or annual gross domestic product.

CoreLogic head of research Nick Goodall believed New Zealand’s sensitivity to rising interest rates would make it difficult for the RBNZ to eventually lift the OCR to around 3.4 per cent by mid-2024, as the central bank has projected.

Nonetheless, Goodall said a mitigating factor is that some mortgage holders would’ve kept their repayments up when interest rates were rock bottom. Thus, their disposable incomes won’t be taking a hit as rates rise.

The RBNZ, in its latest Financial Stability Report, also said the fact banks were stress testing mortgage applicants at around 6 per cent during the pandemic provide “some reassurance buffers are in place to ensure debt serviceability continues”.

Banks are now testing mortgage applicants at rates north of 7 per cent.

Asked about the wider effects of higher mortgage rates, Finance Minister Grant Robertson said 2022 is going to be “a very challenging year”.

He recognised higher mortgage rates would squeeze households’ budgets, but noted a positive is that the unemployment rate is very low.

“What I’d ask everybody to do is that when they take on debt, they think about not just the rate at which they borrowed, but the rate at which they pay back,” Robertson said.

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