Mortgage rates have exceeded what many borrowers were stress-tested at

Saturday, 6 May 2023

Recent data shows that in March, nearly 12% of borrowers were behind – that’s around 427,000 people.

Mortgage rates have exceeded the rates many borrowers who bought at the peak of the market were stress-tested at, according to the Reserve Bank.

In May's Financial Stability Report, the Reserve Bank found households that borrowed during the period of very low interest rates between late-2020 and late-2021 (when the market was running hottest) were stress-tested at rates below what they are today.

“Therefore, some of these borrowers and other borrowers with high debt-to-income levels may begin to struggle to meet their repayment obligations as they reprice onto the higher rates,” the report read.

The central bank found a quarter of current mortgage lending originated during 2021, with about a fifth belonging to first-home buyers, and that over half of borrowers were either on floating rates or would refix in the next year.

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A graph in the report reveals the wide spread of the rates different lenders were stress testing at.

At their greatest spread in early 2021, some lenders were stress testing in the mid-5% range while others were above 7%.

The bank’s report does not identify which lender was conducting which stress test.

The methods banks used for stress testing have been described as a black box, and each bank sets its own requirements for testing home loan borrowers.

Centrix is a credit reporting company, and managing director Keith McLaughlin said he did not believe any banks had been engaging in irresponsible lending.

A Reserve Bank graph showing stress testing rates against mortgage interest rates

He said the current situation was due to interest rates having risen so quickly.

“I’m not a young man and I can’t recall ever such a rapid rise in interest rates over such a short period of time,” he said.

Centrix managing director Keith McLaughlin said under mortgage stress should talk to their banks, which may be able to help with some relief.

“No one expected this two years ago.”

Centrix provides banks with credit information for new home loan applicants, but the company was not involved in any decision-making for who received loans.

Centrix data revealed that 8 months ago 0.84% of home loans were in arrears, a number that had risen to 1.31%.

That equated to 29,300 households now in mortgage arrears, and McLaughlin said many were soon to roll-off from fixed terms onto newer, higher rates.

The Reserve Bank estimating about 60% of housing lending was either on a floating interest rate or on a fixed rate that was repriced within 12 months.

McLaughlin said the mortgage was the last debt Kiwis would generally go into arrears on, if they were under financial strain.

Across all types of debt, 429,000 household now had some form of missed payments, whether that be on personal loans, car loans, or the mortgage.

The bank found two factors would lessen the degree of stress that repricing might cause.

“Firstly, affordability test rates are used to determine the maximum loan amounts that applicants can afford, and many borrowers borrow less than this amount,” it found.

“Secondly, nominal household incomes have grown strongly in the past two years.”

The Reserve Bank also found early-stage arrears, which were missed payments by a borrower of one to three months, had been increasing in recent months, to reach pre-pandemic levels.

“Compared to the global financial crisis, these indicators so far remain low. Rates of non-performing mortgages and the number of mortgagee sales are also low albeit growing,” the bank found.

In November 2021 the Reserve Bank sought feedback on creating a floor on the test interest rates – a tool which is used in other countries.

In Australia, since October 2021, banks have been required to stress test at 3 percentage points above the rate lent out at, and in Norway it was 5 percentage points above the prevailing interest rate, according to the Reserve Bank’s report.

After consultation with banks, industry and community groups the Reserve Bank decided not to pursue any kind of floor, instead focusing on designing a framework to implement debt-to-income restrictions.