Low equity also a factor, says adviser
HSBC customers are at risk of becoming “mortgage prisoners”, where they remain on a floating rate and are unable to lock in a new fixed rate or change lenders, a mortgage adviser says.
First home buyers with lower deposits who purchased a property in the last two years may also be at risk, due to lifestyle changes and/or low equity in their home.
Eugene Bartsaikin (pictured above), director and mortgage adviser at Twine Financial Advisers, said that amid interest rate rises and a decline in property values, the incidence of mortgage prisoners had increased.
But as banks are fairly similar in their level of competitiveness, the increase is not as prevalent as it may seem, he said.
“The bigger risk of mortgage prisoners is HSBC clients, who potentially in six months’ time, might be on the more expensive floating rate [as fixed rates in NZ are lower],” Bartsaikin said.
Read more: Fixed rate vs. floating rate - Tips for homebuyers in NZ
HSBC announced on June 13 that it would exit its wealth and personal banking business in New Zealand. Fixed rate customers with loans maturing before September 13 would be offered a further fixed rate term for six months before moving to a variable rate, while customers with loans maturing after this date would move to a variable rate straight away.
Bartsaikin estimates that HSBC home loan customers who remain on a floating interest rate (as they are unable to lock in a new fixed rate) will pay 1% to 1.5% more.
“If someone has a $500,000 or $600,000 mortgage, a 1% difference is almost $100 per week,” he said.
Following rapid tightening of monetary policy, the official cash rate having risen 12 times since October 2021 to the current level of 5.50%, Bartsaikin said he had noticed more “tension in the air” and frustration as homeowners tried to make sense of how their repayments would be affected.
Recent first home buyers with low deposits also at risk
First home buyers with a low deposit who purchased their home in the last two years are also at risk of becoming mortgage prisoners, Bartsaikin said.
Banks aim to avoid mortgagee sales wherever possible, and moving to interest-only repayments or extending the loan term are among the options available to manage the increase in cost.
However, where there’s insufficient equity in the property, a bank has limited options as far as how to help the client, Bartsaikin said.
“That’s where there are true examples of mortgage prisoners, where they can’t really sell their house and they can’t change banks because they might not meet stress testing rules and they might not have enough equity in their home to make that work,” he said.
Over a typical 30-year loan term, it is reasonable to expect borrowers to experience a range of life changes, Bartsaikin said. One example is a young couple who purchased their first home early in the career, receiving two median incomes. Having started a family, one person goes on maternity leave and their household moves to single income.
Bartsaikin said that banks did not typically take the dual incomes into account for loan applications until close to when the person on maternity leave returned to work.
“Some banks will be more open minded to that and some have a very black and white policy, [requiring] the spouse to return to work before they can use their income for stress testing,” he said.
Bartsaikin said that some banks were taking a “liberal approach” to removing the low equity margin applied to loans with less than 20% deposit.
He cited a case where a client had purchased a home with a 15% deposit and over the course of a year, had paid down some of his loan and made a lump sum repayment as a result of a bonus. The bank was willing to use the original purchase price of the property as the value rather than the current digital valuation.
“There are banks that are actively trying to help people come off those low equity margins, and that’s really great to see,” he said.
Light at the end of the tunnel
While there is no guarantee that interest rates have now peaked, and there’s the possibility of a further rate hike, commentators are expecting interest rates (and retail mortgage rates) to be near the top in the current cycle.
RBNZ’s May Monetary Policy Statement forecast shows official cash rate cuts from the third quarter of 2024.
As mortgage rates start to fall, the stress test rates (used to assess affordability of the loan) will also fall, Bartsaikin said. Mortgage rates and house prices are inversely related to one another (as interest rates rise, house prices fall and vice-versa), he said.
“As stress test rates fall (and as inflation pushes up incomes slightly), we will eventually be in a position where we can refinance if we need to,” Bartsaikin said
“As soon as we start to get upward momentum on house prices, I think that mortgage prisoners will find that the ‘jail cells’ begin to open.”
