Here’s why the inflation figure is bad news for mortgage borrowers

Increases in interest rates on fixed-term mortgages are expected in the coming days after the announcement that inflation remains stubbornly high.

Bank economists now predict that Reserve Bank Te Pūtea Matua will raise the official exchange rate (OCR) by 75 basis points next month, which SBA Chief Economist Nick Tuffley said would be followed by increases of 50 basis points in February and April.

A move of 75 basis points in November would also cause floating rates on home loans to rise by about the same amount, said independent economist Tony Alexander.

But Alexander said borrowers should also prepare for increases in fixed-rate loans in the coming days after Stats NZ said prices rose 2.2% in the September quarter, carrying inflation annual rate at 7.2%, just below the 7.3% annual rate reported three months ago.

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Alexander said banks held back on rising fixed rates on home loans, despite rising funding costs.

The average bank margin on one-year fixed-term home loans fell to 0.4% from 1.2% two months ago, he said, and banks predict they will not allow let it continue.

“We’re going to see a series of pretty big increases in fixed mortgage rates,” he said.


Prime Minister Jacinda Ardern said New Zealand’s inflation rate was starting to peak.

While the variable rate loan increases go into effect immediately for borrowers, this only applies to $39.7 billion of the $340.5 billion in home loans due to banks at the end of the month. ‘august.

The rest was in the form of fixed-term loans, most of which had to be refixed over the following 12 months.

Westpac chief economist Michael Gordon said households still had strong balance sheets.

The bank's economists now predict that the official exchange rate will rise by 75 basis points next month.

Katherine George

The bank’s economists now predict that the official exchange rate will rise by 75 basis points next month.

“Mortgage rates have been rising for some time and an increasing number of borrowers are now abandoning the very low fixed rates that were on offer during the pandemic,” he said.

“However, the impact of these rate increases has not been as severe as we might have expected. Indeed, we are still seeing a large number of households being ahead of their mortgage payments.

The Bankers Association said in late June that just under 46% of people with home loans were ahead of their scheduled repayments.

Credit bureau Centrix said in September that just under one in 100 households were in arrears, but there were few signs of mortgage stress.

A period of low unemployment had seen the number of households in arrears on their home loan repayments rise from 1.49% at the start of 2020.

The big banks’ floating mortgage rates range from 7% to 7.35%, so a 75 basis point hike would exceed 8%.

The last time variable rate mortgages exceeded 8% was at the end of 2008, when the world was in the grip of the global financial crisis. Sales of mortgages by banks increased as unemployment rose from 3.8% to 6.8% and remained consistently high for a few years.

But Alexander didn’t expect history to repeat itself because defaults on home loans were correlated with job losses.

The Reserve Bank expects unemployment to rise from 3.3% to 5%, he said.

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Tony Alexander says the planned increases in mortgage rates will not cause them to exceed bank affordability test rates.

Alexander said rising mortgage rates did not take them higher than the affordability test rates that banks used to test whether people could afford the loans they were applying for.

Nadine Higgins, financial adviser at, said many households would be able to save money by cutting back on spending, looking for cheaper deals on things like electricity and insurance, and restructuring their real estate loans.

People anticipating higher mortgage rates needed to budget for them now, but some would struggle.

“There’s definitely a group of people who will have cut to the quick and there’s no room for more cuts,” she said.

But that group was small, she said.

The Reserve Bank closely monitors new mortgages with a debt-to-income ratio (DTI) above five.

In the year to June 30, according to the latest available figures, $15.9 billion of first-time home buyers and $17.9 billion of other non-investor borrowers took out loans with DTIs. of five or more.