Here is why the inflation figure is bad news for home loan borrowers

Tuesday, 18 October 2022

The overall inflation rate gives a good measure of the bigger picture, but it’s just an average. Video first published August 30 2022.

Fixed-term home loan interest rate increases are on the cards in the next few days following news that inflation remains stubbornly high.

Bank economists are now predicting the Reserve Bank Te Pūtea Matua will lift the official cash rate (OCR) by 75 basis points next month, which ASB chief economist Nick Tuffley said wouldbe followed by 50 basis point hikes in February and April.

A 75 basis point move in November would also drag up floating home loan rates by about the same amount, said independent economist Tony Alexander.

But Alexander said borrowers should also brace for fixed rate loan increases in the next few days after Stats NZ said prices rose 2.2% in the September quarter, taking annual inflation to 7.2%, only just under the 7.3% annual rate reported three months ago.

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Alexander said banks had been holding back on lifting fixed home loan rates, despite funding costs rising.

The average bank margin on one-year fixed-term home loans had fallen to 0.4% compared with 1.2% two months ago, he said, and predicted banks would not allow that to continue.

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“We are going to see a round of some pretty sizeable increases in fixed mortgage rates,” he said.

While floating rate loan increases kick in immediately for borrowers, that applies only to $39.7 billion of the $340.5b home loans owed to banks at the end of August.

The rest was in fixed term loans, with most due to refix in the following 12 months.

Westpac chief economist Michael Gordon said households still had strong balance sheets.

“Mortgage rates have been rising for some time and increasing numbers of borrowers are now rolling off the very low fixed rates that were on offer through the pandemic,” he said.

“However, the drag from those rate increases has not been as stark as we might have expected. Indeed, we are still seeing large numbers of households running ahead on their mortgage payments.”

The Bankers Association said at the end of June that just under 46% of people with home loans were ahead of their scheduled repayments.

Credit reporting bureau Centrix said in September just under one household in every 100 was behind on repayments but there was little sign of mortgage stress.

Independent Economist Tony Alexander says property sales have fallen to levels not seen since the end of the global financial crisis.

A period of low unemployment had seen the number of households behind on their home loan repayments fall from 1.49% in early 2020.

Big banks’ floating home loan rates range from 7% to 7.35%, so a rise of 75 basis points would take some above 8%.

The last time floating rate mortgages were above 8% was in late 2008 when the world was gripped by the global financial crisis. Mortgage sales by banks rose as unemployment spiked from 3.8% to 6.8% and remained persistently high for some years.

But Alexander did not expect history to repeat as defaults on home loans were correlated with job losses.

The Reserve Bank expected unemployment to rise from 3.3%, peaking at 5%, he said.

Alexander said rises in mortgage rates were not taking them higher than the affordability test rates banks used to check whether people could afford the loans they were applying for.

Nadine Higgins, financial adviser at Enable.me, said many households would be able to find some savings by trimming spending, looking for cheaper deals on things like power and insurance, and restructuring their home loans.

People anticipating mortgage rate rises needed to budget now for them but some would struggle.

“There is definitely a group of people who will have cut to the quick and there isn’t room to cut further,” she said.

But this group was small, she said.

The Reserve Bank closely monitors new mortgage lending with a debt to income (DTI) ratio of over five.

In the year to June 30, the latest figures available, $15.9b of first home buyers and $17.9b of other non-investor borrowers took out loans with DTIs of five or higher.