7 Dec 2022

How high are mortgage interest rates really going to go?

4:07 pm on 7 December 2022

By Susan Edmunds of Stuff

Blue house pointing up and red house pointing down.

Experts differ in their assessments of whether mortgage interest rates have peaked or not Photo: RNZ

Home loan interest rates have picked up again in recent weeks, since the Reserve Bank lifted the official cash rate by a record 75 basis points.

While other central banks around the world have slowed their pace of interest rate increases, New Zealand borrowers have been warned to brace for more hikes in the new year.

The official cash rate is predicted to peak at 5.5 percent, from its current 4.25 percent.

But with even some fixed terms now pushing up toward 7 percent and floating rates nearing 8 percent, borrowers might be wondering how much tougher things are likely to get.

Floating rates

Chris Tennent-Brown, senior economist at ASB, said he expected floating rates to peak at between the mid-8 percent range and mid-9 percent.

Banks tend to pass most of the official cash rate increases through to floating rates as they happen. But this does not have as much of an effect on borrowers because only a small portion of home loan lending is on floating rates.

Fixed terms

Tennent-Brown said he expected one- to five-year fixed rates to peak in the high 6 percent to mid-7 percent range.

Today, two-year special rates at the main banks ranged from 6.15 percent to 6.74 percent.

In broad terms, every percentage point increase in interest rates adds $1000 per year per $100,000 borrowed. A $500,000 loan on 6 percent a year costs $30,000 in interest, but at 7 percent it costs $35,000, plus any principal repayment.

Independent economist Tony Alexander said there was 90 percent probability that fixed rates had already peaked, based on the softening business confidence, dwelling consent numbers being down and signs of prices softening.

But Kiwibank chief economist Jarrod Kerr said if the Reserve Bank followed its forecast track, all interest rates would end up above 7 percent and some as high as 8 percent.

At an 8 percent rate, a $500,000 loan would cost $3859 a month over 25 years.

"The Kiwi favourites, one- and two-year fixed rates, rising above 7 percent will put a great deal of stress on some households rolling off 2 percent to 2.5 percent rates of last year," Kerr said.

"On an $800,000 loan, the amount of interest payable per year spikes from $20,000 or less, to something closer to $60,000. That's a big increase."

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Photo: Supplied/ Dan Bailey

Gareth Kiernan, chief forecaster at Infometrics, said he expected the official cash rate to end up peaking at 5.75 percent, which would take mortgage rates to between 7.25 percent and 7.5 percent between the middle to end of next year.

"The peak is pretty similar across all rates, which reflects that the shorter-term fixed rates will be more affected by upcoming OCR increases in the next six months than longer-term rates. Note that the mortgage rates I'm referencing are the ones for people with over 20 percent equity, although those don't seem to be the rates that have been hitting the headlines in the last couple of weeks."

Banks offer "special" rates to people with more equity in their properties. "Standard" rates for people who do not qualify are more expensive - ANZ's special one-year rate was 6.54 percent on Wednesday but its standard rate was 7.14 percent.

Kiernan said he expected about 80 percent of official cash rate movements to pass through to one-year fixed rates, down to 45 percent passing through for four- and five-year rates.

"In other words, if we though the OCR was going to peak at 6.75 percent, it would add another 0.8 percentage points to the peak one-year rate, and 0.45 percentage points to the peak five-year rate.

"The Reserve Bank's November 2021 monetary policy statement predicted a peak OCR of about 2.5 percent to 2.75 percent. So in the context of wondering how bad it could get, the three percentage point upward revision to forecasts over the last year makes it feel like, at the moment, the sky is the limit."

What can you do if you're worried?

Enable Me financial coach Nadine Higgins said people were "freaking out" before they had worked out what rates rises might mean for them.

"You need to know at what point rates will become painful for your situation, as that can inform the options you could consider."

She said people who had a mortgage term that was shorter than 25 years could apply to extend it out again, which would reduce the repayment required.

"Consider whether there is a benefit in refinancing to another bank - as the mortgage market is slow, many are offering decent cashback offers and, provided there aren't commission claw backs with your current bank, that can help offset the increase in rates for a period of time, buying you some breathing room," she said.

"If you have savings outside of your mortgage, or perhaps relatives do, consider setting up an offset or revolving credit facility to utilise that money to reduce your interest costs. However, be careful about making lump sum repayments as you can't get that money back without reapplying to the bank for the money. Flexibility is key."

If people were very worried about rates rising further from here, she said they could consider breaking their current fixed terms and fixing for longer.

"This requires some careful analysis given you'll be voluntarily heading on to higher rates.

"If you're in mortgage stress, or can see that you're heading that way, talk to the bank as soon as you can - they will be able to tell you whether options like interest only repayments might be applicable to you."

Kerr said people should remember it was not all bad news.

"For every borrower there is a saver. And savings rates are increasing as well.

"Savers suffered during the pandemic as interest rates were slashed. Households dependent on income from their savings, retirees for example, are now receiving term deposit rates well above 5 percent. So while some households struggle to pay higher rates, other households receive more in interest income."

* This story originally appeared in Stuff.co.nz.

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