NZ Economic bulletin: An update on household mortgage costs
The pressure on households’ finances is mounting. While mortgage rate fixing delayed the impact of OCR rises, increasing numbers of borrowers are now rolling on to higher interest rates.
- Over the past year, fixed mortgage rates insulated many New Zealand borrowers from rising interest rates. However, that only delayed the hit from the rising Official Cash Rate (OCR) to households’ finances.
- Large numbers of fixed mortgages have now repriced, resulting in many households facing large increases in their debt servicing costs. The average interest rate on outstanding residential mortgages has increased by around 100 bps since early 2022.
- We expect the average mortgage rate will rise by a further 160 bps over the year ahead as borrowers continue to roll off earlier low fixed rates. That will dampen demand and domestic inflation pressures.
- This increase in the effective interest rate that borrowers are facing is a key element of the monetary transmission mechanism. It highlights that New Zealand is now firmly in the “sweet spot” for the transmission of the RBNZ’s tightening to the economy and inflation.
Effective mortgage rate*
* The effective mortgage rate is an estimate of the average interest rate borrowers are paying on all outstanding mortgages and accounts for the fact that most borrowers pay fixed rates that are only periodically renegotiated rather than paying the interest rates that are currently on offer.
Mortgage pressures mounting
Previously we’ve highlighted that widespread mortgage rate fixing has insulated many households from the impact of OCR increases. Around 90% of New Zealand mortgages are on fixed interest rates, usually for terms of one to two years. That’s meant many borrowers have remained on the very low interest rates that were on offer in the wake of the pandemic, even as new mortgage rates have climbed rapidly.
However, while mortgage rate fixing has delayed the impact of interest rate rises, we are now in the ‘sweet spot’ for the transmission of monetary policy, where the impact of rate increases is being clearly felt. The OCR has been rising for more than 18 months, and large numbers of borrowers have now rolled on to higher interest rates. Accounting for the extent of mortgage rate fixing, we estimate that the average ‘effective’ mortgage rate that New Zealand borrowers are paying has increased by close to 100 bps since early 2022.
Looking ahead, the coming year will see around 50% of all fixed rate mortgages repricing onto much higher interest rates. That will see the average mortgage rate rising by a further 160 bps by early 2024. (Note: This change is a result of borrowers rolling off earlier low fixed mortgage rates and onto the interest rates that are currently on offer. This is not a comment about how mortgage rates will change in the future.)
As household finances come under increasing pressure, we expect an extended period of weak economic growth, with the economy tipping into recession through late 2023 / early 2024. The rise in interest rates will mean that the average household’s spending on interest costs will increase from around 5% of their disposable income in 2022 to 10% in 2024. Combined with large increases in living costs, that will suck a sizeable amount of cash out of households' wallets and will be a significant drag on household spending. We also expect further falls in house prices. That downturn in demand will ripple through the labour market and wage growth, and will ultimately dampen domestic inflation.
Our earlier paper “From Squeeze to Crush” looks at how increases in mortgage rates will affect different household groups, including a breakdown of mortgage costs by region.
Against this changing interest rate backdrop, Westpac has been writing to around 6000 customers each month who are approaching expiry on a fixed rate to discuss their options and point them to digital tools to assist with their borrowing decisions. In addition, Westpac has also been phoning those customers who are facing the largest repayment increases and who we think may need more help. Westpac ask anyone who has concerns about their finances to come and talk to us early so we can assess their options.
Media contact:
Satish Ranchhod, Senior Economist
P: +64 9 336 5668
M: +64 21 710 852
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