$85b in home loans owed by pandemic peak borrowers

Monday, 8 May 2023

Reserve Bank questioned at Finance and Expenditure Committee as home loan stress testing rates come under the spotlight.

A quarter of all mortgage debt is owed by borrowers who people who took the loans out at the pandemic peak of the market.

That equates to more than $85 billion in home loans that have refixed, or will refix, on higher interest rates than the rates banks stress-tested borrowers against when the loan was made.

The finding appeared to cause alarm at last week's Finance and Expenditure Committee, but the Reserve Bank said those borrowers were likely able to cope by cutting back on other spending, and that stress tests themselves had buffers built into them.

In May's Financial Stability Report, the RB 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.

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About a fifth of those facing higher rates than they were stress-tested at were first-home buyers.

National’s deputy leader Nicola Willis said she was “very worried” about the financial situation for many Kiwis, particularly given rating agency Standard & Poors had warned New Zealand’s credit rating could be reduced if the current account deficit did not improve.

“The data shows us that more people are going into mortgage arrears, that people are going into more debt arrears – because we know the last thing to go is the mortgage.

“People will not pay their credit cards, they will not pay their rates, and the mortgage is the last to go.

“If you’ve already got 25% of mortgage lending beyond the limits of where it’s been stress tested at, and then you add another interest rate hike on that if we are downgraded, how resistant will our system be to that?”

The Reserve Bank did not supply which of the stress testing rates belonged to which lender.

She asked whether the country could enter a spiral, given Reserve Bank warnings of more significant house price falls in the event that distressed sales picked up.

Reserve Bank deputy governor Christian Hawkesby said there were pockets of borrowers more exposed, but overall financial stability of households was good.

New Zealanders are currently carrying over $342 billion in mortgage debt.

He said the strong position banks were in, with many recently reporting record profits, meant stressed borrowers could work with their banks to find a solution – including switching to interest-only repayments or repayment holidays.

Hawkesby said stress-testing rates had buffers built-in, and did not represent the point at which a borrower could no longer afford their home.

“What will happen is that as they get closer to those test rates there will be some adjustment in the consumption.”

He said this was the objective of jacking up interest rates – to reduce domestic demand for goods and services, and kerb inflation.

“This is one of the transmission tunnels through which that is working.”

Hawkesby said the Government bond and debt markets suggested the market was not concerned about New Zealand, and government debt was still relatively low compared to other countries.

Willis asked if New Zealand was in “the worst scenario situation possible”.

“We have still got a roaring cost of living with high inflation eating away at the buffers, we also have a significant amount of borrowing in the economy that is now having to accept a much higher interest rate than banks ever tested for,” she said.

Hawkesby pointed to the strong labour market as a likely saving grace. Unemployment remains near record lows.

Reserve Bank governor Adrian Orr said all of the changes were results the Reserve Bank would expect to see as it tightened monetary policy environment.

“I would characterise it as business as usual with monetary policy, except with the background of a very resilient financial system and very low unemployment historically,” he said.

Manager of forecasting Chris McDonald said the test rates also informed the maximum amount banks were willing to lend, but the majority of borrowers actually borrowed less than that.