Home loan mortgage interest rates rise at fastest pace in 15 years and there’s more to come

Home loan interest rates have risen at their fastest pace in 15 years during the past six months and experts predict they will continue to rise.

Special mortgage rates for a one-year fixed term at the main trading banks have risen to between 3.45 per cent and 3.65 per cent compared to six months ago when they hit lows of 2.25 per cent.

Banks are offering two-year fixed term rates of between 4.15 per cent and 4.35 per cent, compared to 2.5 per cent six months ago.

Economists at the ANZ, the country’s largest bank, say swap rates have soared as markets have assessed where New Zealand’s official cash rate is likely to sit over coming months and mortgage rates have followed suit.

“Indeed, we’ve seen the fasted increase in mortgage rates in at least 15 years,” they noted in a property report released this week.

Kelvin Davidson, a senior economist at CoreLogic, said while many people had been warning of higher interest rates to come there would be few who had expected them to rise this quickly.

“It has been certainly sharper than almost anybody would have thought.”

Davidson said some people who borrowed money and fixed two years ago might not see much change as they re-fixed again having missed the market trough, and others whohad kept their payment the same regardless of the rate drop would be fine.

“But there are going to be a lot of people who borrowed in September, October last year on a one-year fixed term, pretty much at the trough, who are now facing the roll-over of that loan and looking at pretty big changes.”

On a $300,000 mortgage with a term of 25 years, a borrower would be paying $302 a week if they had fixed for one year six months ago at 2.25 per cent. But that same mortgage will now cost $344 a week to service at a one-year rate of 3.45 per cent.

Likewise a borrower who fixed for two years six months ago would be paying $310 a week compared to someone fixing for two years now who will now be paying $371 a week. Those changes add up to thousands of dollars more a year.

“It’s a direct hit to people’s disposable incomes; it’s like a tax effectively,” Davidson said.

The mortgage rate rises come at the same time as petrol and food prices have shot up.

Davidson said there were lots of reasons why the rates had gone up so quickly.

“It wasn’t that long ago that we were talking about the first official cash rate increase not being until 2023. Within a month or two that came forward to ‘oh we have already seen the official cash rate go up’. “

In Australia the central bank had indicated it would not be raising its rate any time soon, he said.

New Zealand’s Reserve Bank is expected to increase the official cash rate again next Wednesday. It is currently at 0.5 per cent but economists are predicting it could rise to 0.75 per cent or even 1 per cent.

Bruce Patten, a mortgage broker with Loan Market said mortgage brokers were being inundated with emails from the banks telling them about rate rises; one bank had done it twice in one week.

“We are just bombarded with the rate increases.”

Patten said the rate rise was unprecedented especially when Australia was still talking about holding its rate until 2024.

He said the swap rates had gone on a big trajectory up and that was being driven globally.

“But that is not the only driver of our interest rates, it is people putting money in the bank, it is money the bank gets off the Reserve Bank who have only increased the OCR from 0.25 to 0.5 per cent. That hasn’t gone up by 2 per cent but yet the banks seem to be flowing the fixed rate increases through one, two, three, four and five years.

“It is screaming up at a great rate of knots that wasn’t expected.”

Patten said a lot of people were breaking their current mortgage rate because as the rates went up the cost to get out of a lower rate was negligible.

“A lot of people are breaking and fixing for two or three years to give themselves a bit of comfort.”

But he said it would catch people out as there were a lot of people that were unaware of the changes.

“It will catch a few people out for sure.”

Patten said he was expecting more interest rate increases.

“ASB just increased theirs yesterday again. Certainly if the Reserve Bank goes up by half a percentage as they are predicting it is going to have a big flow-on to people before Christmas.”

Patten said people who had bought houses in the past year would be the ones who would struggle because they had only ever seen rates come down.

“The ones that kept payments at a higher level will be fine. It is really the ones that have reduced their payments to use the money for other things, or went off and had a family, they are the ones that will be impacted by this, more so than anyone else. It is going to be a bit of a crunch.”

CoreLogic’s Davidson said modelling scenarios for affordability showed mortgages were already absorbing about 41 per cent of gross household income.

“The average for that is 37 per cent – so it is already back above the average.”

“Not only is it back above average it is back at the highest level since mid 2008 when mortgage rates were more than 9 per cent.”

That’s because house prices have risen so much since then, meaning borrowers have had to take on more debt.

“It is true the actual interest rate is lower but when you convert it to what you have to pay, the payments are a lot higher.”

Davidson said if rates rose to 5 per cent the percentage of household income a mortgage took up could jump to 46 per cent and then if it rose to 6 per cent it would be 51 per cent of household income.

“The previous peak we had was 49.9 in Q2 2007. That was when the mortgage rate was about 9.2 per cent.”

“You have to acknowledge there is vulnerability there and this mortgage rate change is a big deal.”

While there was low unemployment and most people would be able to adjust, and banks had been testing affordability at 6 or 7 per cent, he questioned whether borrowers had really thought about what it meant to their budgets.

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