Spike in arrears on mortgages over $500,000 as interest rates and cost of living bite

Wednesday, 13 December 2023

Buyers today must take out large mortgages.

Missed payments on massive, recent home loans are increasing far faster than on more modest home loans, and credit reporting company Centrix says it’s a sign of the emergence of “two economies“.

The first is of people with comfortably-sized home loans, who are managing higher mortgage rates, and the other is of people who took out large loans between 2020 and 2022, who are now struggling.

“The emergence of two economies now exists in Aotearoa New Zealand, with a huge split between those who are carrying relatively large, recently-acquired mortgages, and those who have paid down or paid off their mortgages and may have funds on deposit,” said Keith McLaughlin, managing director of Centrix.

Centrix data showed that in October, the value of mortgages behind by more 30 days or more was 55% higher than the previous year.

“Many of those who took out mortgages in 2020 and 2021 will now be feeling the squeeze from both decreased property values and shifting interest rates, with many rolling off from two to three percent to higher rates,” McLaughlin said in KPMG’s annual report on non-bank lenders.

“This trend is resulting in a spike in the number of mortgages valued at over $500,000 going into arrears,“ he said.

Budget mentor David Verry says it used to be that it took a job loss for people to run into trouble on a home loan, but with larger mortgages “now, you’re not even a job loss away”.

Financial mentor David Verry said larger mortgages put people at greater risk of not being able to manage increases in home loan interest rates, alongside rises in the cost of living, including insurance and rate rises.

The effect of interest rate changes on people with a $600,000 to $800,000 mortgage, was massive, he said.

“You only have to have a change in the interest rate, and it buries some people,” he said.

It used to be that it took a job loss for people to run into trouble on a home loan, but Verry said with larger mortgages “now, you’re not even a job loss away”.

People with smaller mortgages could absorb rate rises far more easily, he said.

“Twelve to 18 months ago budget services just didn’t see people who had mortgages because mortgage rates were so low, 3%. There was no real pressure there.”

Centrix said 0.42% of mortgages of under $500,000 were in arrears by 30 days or more.

Centrix managing director Keith McLaughlin says older people are faring better on mortgage arrears, probably because they have smaller home loans.

That compared to 0.62% of mortgages of over $500,000.

Such was the scale of borrowing in recent years, that 47% of all mortgages were over $500,000, Centrix said.

Only time would tell how 2024 played out, he said, but it was clear that there was a real need to get the cost of living crisis under control to help those financially-stretched households.

McLaughlin identified a generational divide emerging with older people faring better, which was likely the result of them having smaller mortgages, or having paid mortgages off altogether.