Some household budgets will be crushed by rising interest rates this year, Westpac says
Tuesday, 17 January 2023
Some households’ budgets are going from squeezed to crushed, says Westpac senior economist Satish Ranchhod.
While 2022 was the year in which inflation squeezed households’ spending power, 2023 would be the year in which higher home loan rates put many households under intense pressure, he said.
Ranchhod calculated that the “effective” mortgage rate being paid by households was currently about 3.7%, but by the end of the year, it would be 5.3%.
The effective mortgage rate is an estimate of the average interest rate borrowers are actually paying, and accounts for the fact that the vast majority of borrowers fix their mortgages, rather than paying the interest rates that are currently on offer.
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Close to half of all fixed-term mortgages would come to the end this year and borrowers would have to refix at higher rates, he said.
“The resulting large increase in fortnightly interest payments will take a large bite out of many households’ disposable incomes,” Ranchhod said.
The average two-year fixed rate home loan was 2.6% in November 2020. It was 6.3% in November 2022.
The increasing proportion of households’ income being diverted into home loan repayments would cause a ripple effect through the economy, and result in an economic slowdown, he said. Westpac was forecasting unemployment to rise from 3.3% to 4.8%.
The pain would not be felt equally, with the most heavily-indebted being hit hardest.
“For those households who first took out their mortgage over the past one to two years, the interest rate increases now in train signal a much larger squeeze on their finances,” Ranchhod said.
Someone outside Auckland who bought an average-priced house in 2020, and took out an 80% mortgage fixed for two years would see their minimum fortnightly payments rise by about $470 per fortnight, if they refixed now, Westpac calculated.
If that buyer were in Auckland, the increase in debt servicing costs would be $811 per fortnight, the bank said.
The equivalent numbers for Wellington and Canterbury would be $622 and $414.
“On average, the borrowers in this example would need to spend around 12% more of their disposable income to meet the minimum repayments on their mortgage,” Ranchhod said.
Because households were still paying relatively low fixed rates, the national-level cost of servicing mortgages was at multi-decade lows, but 2023 would change that.
“We’re forecasting that the [Reserve Bank] will deliver another 75 basis point hike in February, and expect that will be followed by a 50 basis point rise in April,” Ranchhod said.
“Those increases would take the cash rate to 5.5%, its highest level since 2008.”
The official cash rate is currently 4.25%.
Only about one-third of households lived in homes on which they were paying the mortgage, he said, with roughly another third renting, and another third either in mortgage-free homes, or homes owned by someone else with no rent paid.
People who owned homes with no debt would not escape the economic pain entirely, suffering falls in the value of their homes, Ranchhod said.
And renters might find landlords try to lift rents as their finance costs increase.