Economists at the country’s largest bank are projecting mortgage rates to rise to over 4 per cent by the end of next year, putting pressure on borrowers to collectively find an extra $5 billion.
Economists at the ANZ expect the interest rate on a one-year fixed term could rise from around 2.2 per cent to 4 per cent by December 2022.
While two-year fixed terms could be as high as 4.4 per cent by then, up from 2.6 per cent currently.
Longer-term five-year rates could rise from around 3.6 per cent to 4.7 per cent, they forecast.
That could see one-year fixed term rates rise to 2.8 per cent by September and 3.2 per cent by the end of this year, rising to 3.7 per cent by midway through 2022 and 4 per cent by the end of 2022.
A homeowner with a $500,000 mortgage on a 25-year term would be paying around $498 a week at a rate of 2.2 per cent but that would rise to $607 a week at 4 per cent.
Over a year the amount they are paying would rise from $25,896 to $31,564.
For a first-home buyer borrowing $700,000 the interest rate increase could see them go from paying around $698 a week to $849 or an annual increase from $36,296 to $44,148.
David Croy, senior strategist at the ANZ, said the biggest change it was expecting over the next 18 months was a 150 basis point increase in the Official Cash Rate.
“We think the first hike will come in August, followed by another five hikes spread out every quarter taking it to 1.75 per cent.”
The Official Cash Rate was cut to a record low 0.25 per cent last year in response to Covid-19 resulting in never before seen low mortgage rates.
But with New Zealand’s economy recovering strongly and inflation running hot at an annual rate of 3.3 per cent economists are predicting the Reserve Bank will take steps to lift the OCR from next month.
The next decision on the cash rate is due on August 18. But banks have already begun increasing their mortgage rates with all the main trading banks upping their rates earlier this month.
Croy said its projections for where mortgage rates could head were based on the two-year swap rate – the benchmark wholesale rate – which heavily influences two-year mortgage rates.
He stressed that the figures were projections, not forecasts.
“There are a number of things that influence mortgage rates beyond just where wholesale rates go but the biggest guide we have is wholesale interest rate forecasts with some assumptions around where margins might go.”
One thing that could see rates rise more slowly could be the re-emergence of Covid.
“Be that another strain. The Delta strain is causing a little bit of grief overseas. There are concerns about how effective the vaccine will be against that.”
The other factor that could slow the rise would be the impact of the interest rate increases themselves on consumer sentiment and consumption, he said.
“There is a bit of a feeling out there in the market that there is a high degree of exposure to interest rates.”
Even with the projected rises mortgage rates will still be historically low. But the big difference this time compared to previous rising interest rate periods is the high level of mortgage debt and New Zealander’s exposure to shorter terms.
Mortgage debt has risen from under $100b in 2005 to close to $315b as of mid-2021.
Nearly 80 per cent of the country’s mortgage debt is either on a floating rate or fixed for less than a year.
Croy said that was a relatively high ratio. “In dollar terms it is the biggest ever volume of mortgage debt exposed to a rate change within 12 months.”
He said in the past 80 per cent of the mortgage market had been fixed for a year or more.
“But this time around it does look like people will get caught off guard. Put bluntly, households will feel the pinch of rising interest rates harder and sooner this time around.”
Can NZers afford it?
“We can because have seen significant increases in asset prices as well.”
But Croy said mortgage rate rises would eventually impact on people’s cashflows.
“The big unknown is how much impact it will have on confidence.”
Higher rates could reduce buyer demand for properties and reduce how much people had to spend, he said. It could also push up rents as landlords sought to pass on the costs.
Fixing long or short
When it comes to a strategy for fixing either long or short the economists say the current term structure of mortgage rates poses a real challenge to borrowers.
“That’s because longer-term rates are now much higher, but equally, if you fix for one year, it’s very likely going to cost more to re-fix in the future.”
Its analysis shows it might be marginally cheaper to fix for two to three years but it’s a close call.
“The choice will depend on whether you prefer certainty or else think there’s a good chance the RBNZ won’t need to hike by as much as markets are expecting.”
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