Home loan interest rate jump could see $10k annual increase in payments
Recent home loan borrowers in the country’s largest city should brace themselves for a potential $10k rise in their annual payments if mortgage rates rise as many are predicting.
Last week the four major trading banks – ASB, ANZ, BNZ and Westpac all increased their home loan rates in the wake of a spike in inflation which has prompted economists to forecast the Reserve Bank could start lifting the official cash rate from next month.
The OCR was cut to a record low 0.25 per cent last year but is now expected to rise with predictions of an increase of around 1.5 percentage points expected to send home lending rates higher.
Analysis by CoreLogic shows the mortgage cost for a first home buyer in Auckland who paid the median price this year of $902,000 using a 20 per cent deposit would rise from $34,201 a year at an interest rate of 2.5 per cent to $43,834 a year if the interest rates were to hit 4.5 per cent.
And for upgraders who have stretched to move into their next home the jump could be even higher, with the median price paid of $1.188 million seeing an increase from $45,046 at 2.5 per cent rising to a potential annual cost of $57,759 at 4.5 per cent.
Kelvin Davidson, chief property economist at CoreLogic, said the message was pretty stark.
“It’s feasible that households will be looking at annual cost increases of close to $10k if interest rates went from 2.5 per cent to 4.5 per cent.”
Davidson said mortgage debt levels were bigger than before Covid hit, which meant that even a small change to interest rates could have a big impact on people’s spare cash.
“If you go from 10 per cent to 11 per cent that’s unwelcome but a 1 per cent rise is a relatively small proportion. If you go from two to three per cent that’s a 50 per cent rise.”
ASB has previously estimated that a one per cent rise in mortgages rates would potentially suck $3 billion out of mortgage-holder’s pockets annually.
Davidson said the proportional change may not have been factored in by people.
“And then there is just a whole generation of borrowers that have never seen mortgages go up.”
Banks have typically stress tested borrowers at interest rates around 6.5 to 7 per cent despite rates dropping as low as 2.19 per cent in the last year.
“It is one thing for the banks to have tested it but another for the borrower to have actually assessed it in terms of their own finances and what that means in terms of what they will have to curtail.”
Davidson said on the positive side unemployment was low.
“As long as people stay in work most people will be able to absorb a rise in interest rates. I don’t think this will cause a melt-down but it will require people to adjust – $10k is far from a trivial amount of money.”
Davidson said the OCR could go up by 1.5 percentage points making a rise to 4 per cent for home loans quite plausible.
“Potentially it could go up two percentage points. A mortgage rate of 4.5 isn’t crazy by any means.”
He said that sort of rise was being forecast over the next two years but said the lesson from the last few months was that could change pretty quickly.
Historically 4.5 per cent would still be low with the long-term average around 6 or 7 per cent. Before the global financial crisis mortgage rates were as high as 10 per cent.
John Bolton, managing director of mortgage broker Squirrel, said the window for people switching to longer term interest rates to lock in a low rate for longer had already passed.
“Long-term rates have gone up too much and don’t really reflect good value for money now. You would be better off fixing for shorter terms.”
Bolton said he recommended borrowers split their mortgage into multiple fixed terms so the whole loan didn’t roll off at once.
“That way you get a gradual adjustment to the increasing rates as opposed to one big scary adjustment.”
He said in general short-term rates – those between one to two years – tended to work out better for borrowers.
“That two year term tends to be where the banks are most competitive,” Bolton said pointing out that borrowers could still grab a 2.49 per rate at Kiwibank for two years fixed at the moment.
“A month or two ago I was recommending everyone fix for three years but that was when it was down at 2.69, 2.79 per cent. Now that it is up over 3 per cent I think people are better fixing for two years at somewhere between 2.49 and 2.69 per cent.”
Bolton said some people who had fixed a while ago at a higher rate could look at breaking their mortgage rate and re-fixing at a lower rate as the break fee could be small enough to make it worthwhile.
“I wouldn’t be panicking at the moment. I think rates are going to generally stay low long-term, it is just what we define as low. We are probably going to see the end of rates in the twos. But rates in the threes are still very low rates.”
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