Over half of new home loans are being issued with 30-year terms

Friday, 22 April 2022

Senior equity analyst Michael Kenealy on whether New Zealand's housing market is the canary in the coalmine for international investors.

Home loans with a 30-year term are now the most common, with 57% of new mortgages taken out this year issued at this longest-term option, data from credit reporting bureau Centrix shows.

The proportion of home loans taken out at a 30-year term have been steadily rising since 2017 as house prices rose, and experts warned their increasing prevalence was reducing borrowers’ ability to cope if mortgage stress increased.

The proportion of borrowers taking out 30-year home loans was highest in the main centres – making up 66% of new mortgages in Auckland this year, and 55% in Wellington.

Home loans with a 30-year term are now the most common.

Thirty-year terms were also more common for first home buyers, making up 74% of new mortgages to the group over the last three year – a figure that has jumped to 83% this year.

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Mint Asset Management senior analyst Michael Kenealy said he wasn’t surprised at the popularity of the longer terms.

“People are stretching their budgets as much as they can, and digging into their pockets as deep as they can, to buy,” he said.

In the past if borrowers struggled to keep up with repayments, they could extend the term of their loan, but this option was being eroded for some, Kenealy said.

Extending a mortgage meant borrowers took longer to pay off the debt, and ultimately paid more in interest, but doing so also reduced immediate repayments.

Mortgage stress is expected to increase with interest rates, and Kenealy said in a worst case scenario some banks may put borrowers onto interest-only repayments for a period, or even re-introduce targeted mortgage repayment holidays, as they did at the start of the pandemic.

He warned if banks started allowing too much interest or debt forgiveness it could create moral hazard, meaning borrowers may become more willing to take on unreasonable risk because they felt protected from consequences.

Centrix analytics general manager Stuart Baxter said there were instances of home loans having terms above 30 years, but these were rare.

Mint Asset Management senior analyst Michael Kenealy says international investors are watching New Zealand’s housing market to see how it reacts to higher interest rates.

“It is not surprising to see longer term mortgages have been on the rise in the last year, as higher property prices and the recent rate hikes have squeezed borrower cash flows,” Baxter said.

“Borrowers are being pushed into longer term mortgages to keep payments as low as they can so that they can meet their short term budget.”

Despite the trend, Baxter said it was unlikely homeowners would see the rise of 35 or even 40-year terms.

CoreLogic senior property economist Kelvin Davidson says in the past 25-year home loans were the norm.

“Considering the average age of a typical first time buyer is in their mid-30’s, a 40-year term would take them well into their 70’s, which I think most banks would want to avoid,” he said.

Baxter said mortgage arrears and financial hardship remained at historically low levels.

“Responsible lending rules are designed to protect the most vulnerable borrower, but with the prospect of further rate hikes and higher costs of living in the months ahead, I think we will see more borrowers who find themselves under mortgage stress,” he said.

Recent Reserve Bank analysis showed that if mortgage rates rose to 5%, nearly 20% of recent first-home buyers would face serviceability stress.

At 6%, this would rise to nearly 50%, and investors and some owner-occupiers would also be under pressure.

Some banks’ rates are already approaching these amounts, including Kiwibank, which has set the floating rate is set at 5%, one-year fixed at 4.55%, and three-years at 5.39%.

CoreLogic senior property economist Kelvin Davidson agreed increased prevalence of longer-term mortgages cut off a traditional method used by struggling borrowers to cope.

He said the most vulnerable groups were recent entrants to the market, who had bought at the peak in November and December, and had gone in with only a 10% deposit.

Davidson said the Reserve Bank was likely to continue to increase interest rates with inflation at a 30-year high.

“The housing market is going to be a little bit collateral damage because they simply have to get general inflation under control,” he said.

He said while mortgage stress would increase as interest rates went up, unemployment remained low, which meant it was unlikely many homeowners would be forced to sell, which in turn made any kind of price crash unlikely.

“Really a lot hinges on the labour market, that’s where the stress could come from if we see job losses,” he said.

Davidson said there was a feeling in the sector that forced sales and mortgagee sales were undesirable for both lenders and borrowers, and banks would work with struggling homeowners.

The Reserve Bank does not collect data on the proportion of home loans issued at different duration terms, which Davidson said could constitute a blind spot for the central bank.