Rising risk of non-performing loans
Despite a recent drop in interest rates, CoreLogic warns that mortgage stress is far from over in New Zealand.
Property economist Kelvin Davidson (pictured above) noted that the percentage of non-performing loans – those overdue by 90 days or more – has increased to 0.6% of all mortgages, marking the highest level in a decade.
“While it’s only half the rate of 2009 and 2010, it’s still concerning,” Davidson told 1News, especially as unemployment rises.
Banks preparing for more bad loans
According to Davidson, banks are already preparing for potential defaults by increasing their provisions for bad housing loans.
“These allowances are now about 40% higher than the largest figure recorded during the COVID era,” he said.
This suggests that mortgage stress will remain a challenge for some time, casting doubt on the strength of any housing market recovery as we approach 2025.
Borrowers opting for short-term fixes
Davidson pointed out that a growing number of borrowers are choosing short-term fixed rates, with 68% of new loans in August set for terms of six months or less.
“For the first time since mid-2021, borrowers who locked in short-term rates are now moving onto lower interest rates,” he told 1News.
However, short fixes may not have been the best decision in hindsight, as longer-term rates from 2021 look like “ultra-low” options today.
Delicate decisions ahead for borrowers
As interest rates continue to fluctuate, borrowers face challenging decisions on how long to fix their loans. Davidson explained that shorter rates, like six-month fixes at 6.7%, remain higher than 12-month options at 6.2%.
To benefit from short-term fixes, rates need to drop further in the next six months.
“Could that happen? Nothing’s out of the question,” he said, noting the potential for a rapid fall in inflation and the OCR, which could push mortgage rates even lower.
Future uncertainty in mortgage rates
While further OCR cuts could lead to lower mortgage rates, Davidson cautioned that many potential declines might already be priced into current rates.
“The delicate decisions currently faced by mortgage borrowers may continue for a while yet,” he said.
Mortgage stress here to stay
Even with falling rates, the rising percentage of non-performing loans and increasing provisions for bad debt indicate that mortgage stress will persist in New Zealand.
Borrowers will need to carefully weigh their options as they decide between short- or longer-term fixes, with the future of interest rates and the economy still uncertain, 1News reported.
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