Mortgage advisers weigh up borrower impacts
The official cash rate has hit 4.75%, increasing by 50 basis points from 4.25%, the Reserve Bank of New Zealand has announced.
In its first monetary policy statement of the year, released on Wednesday afternoon, Reserve Bank Governor Adrian Orr said a further lift in the official cash rate was required to return inflation (currently 7.2%), to its target range of 1% to 3% over the medium term.
“While there are early signs of price pressure easing, core consumer price inflation remains too high, employment is still beyond its maximum sustainable level, and near-term inflation expectations remain elevated,” Orr said.
The decision follows a hefty 75 basis point rise in the official cash rate on November 23, and is off the back of two extreme weather events, namely the Auckland Anniversary Weekend floods in January, followed by Cyclone Gabrielle in February, prompting Kiwibank economists to caution that a rate hike of 50 basis points or higher be sidelined.
The RBNZ acknowledged that Cyclone Gabrielle and other recent severe weather events had devastating impacts on many New Zealanders.
“It is too early to accurately assess the monetary policy implications of these weather events, given that the scale of destruction and economic disruption are only now becoming evident. The timing, size, and the nature of funding the Government’s fiscal response are also yet to be determined,” Orr said.
NZ Adviser spoke to mortgage advisers Sarah Curtis, David Windler and Lucia Xiao about the implications of a further interest rate rise, current stress test rates and how they’re helping clients rolling off lower fixed term mortgage rates.
Sarah Curtis (pictured above left), mortgage and insurance adviser at Sarah Curtis Mortgages acknowledged that the decision to raise the OCR rate during a national state of emergency was unfortunate, but necessary.
While further increases to interest rates could bring unforeseen impacts on mortgaged homeowners already in desperate need, further delays in increasing interest rates could exacerbate existing inflationary pressures, she said.
“Delaying this until April could again cause further pain down the track,” Curtis said.
David Windler (pictured above centre), director and mortgage adviser at The Mortgage Supply Co, said in his view, the impacts of the tragic weather events should influence the RBNZ’s thinking. A pause or a more moderate, 25 basis point rise would have been appropriate, he said.
Lucia Xiao (pictured above right), property coach and founder of Finax Mortgages and Insurance said although immediate relief from interest rate rises would “support Kiwis right now”, a further rate increase would be more beneficial in the long run.
Stress test rates could rise further
Curtis said the stress test rate used by banks is currently in the range of 8.5% to 9%. Given borrowers’ expenses are thoroughly assessed, if fixed home loan interest rates climb further towards the mid-7% range, the existing buffer should be sufficient, she said.
“I think a base test rate at the current level is high enough to allow for the current climate,” Curtis said.
“However, I do think that banks’ individual policies [requiring] specific amounts over the base pass requirements for particular buyers (e.g., higher LVR borrowers needing a higher surplus each month) is a better way to tailor the stress test.”
Noting that existing stress test rates are between the low to late 8% range, Windler said he expected some test rates to increase, noting that serviceability was the main hurdle to helping clients achieve their goals.
“Activity is certainly constrained at the moment because of [higher interest rates and stress test rates] …many who would like to purchase just can’t get the lending they need,” Windler said.
Xiao said that some non-bank lenders were stress testing borrowers above the standard mid-8% range, but noted they were generally “very flexible” with existing lending. Non-bank lenders tend to use the actual repayment amount, whereas traditional banks use stress test rates in all cases, she said.
Use of stress test rates for all lending showed banks were acting as responsible lenders, as this ensured that their customers could continue to service their loans in a rising interest rate environment, Xiao said.
Which buyer groups are active the market?
Curtis, who is based in Kerikeri and works with clients across Northland, said first home buyers continued to represent the majority of new clients looking to buy in the region. The volume of preapproval requests had reduced, and Curtis said she was seeing more clients committed and ready to purchase.
While buyer activity is currently constrained, Windler said some of this team had seen increased activity from first home buyers.
Xiao, who provides a coaching and mentoring programme targeted towards first home buyers, said although interest rates are rising, easing prices had enabled some buyers to purchase.
“Even with clients' reduced ability to borrow, it [has] worked out well for [some] first home buyers, as a smaller deposit is required,” Xiao said.
“For clients who have existing lending, we've found that now is generally not the time to borrow more, or in some cases, the existing lending amount is over their current servicing due to the increases in test rates.”
Strategies used for clients rolling off lower fixed rates
As a large volume of mortgage borrowers roll off lower fixed interest rates this year, Infometrics having confirmed that around 11% were due to roll off from January to March, Curtis said that communication and information are key.
When working with clients whose loans are due to roll over, Sarah Curtis Mortgages has a robust conversation to help them make smart decisions, she said. Clients from whom there will be a significant budget impact are shown what the increase will look like, and further discussion determines whether it will be affordable - or a further plan is required.
Windler said The Mortgage Supply Co is currently looking at opportunities for clients to refix between the one-year, 18-months and 2-year range.
“[We] often look at the spread of those rates, dividing a loan into two or three parts and refixing at those terms,” Windler said.
“It spreads risk and should allow clients to come off these rates onto hopefully lower rates in the mid-term.”
Xiao said some clients were concerned about the length of time that interest rates would rise and had contemplated selling their property.
“In my experience, this is part of the property cycle. Most likely, loans processed while the lenders were using 6.5% test rates should still be serviceable, but clients may need to adjust their lifestyle if their surplus income is reduced,” Xiao said.
“Long-term rates have gone down, which tends to indicate that the trend of rates will eventually decrease. We normally do not suggest clients to refix for long terms but recognise the need to take into account the clients' personal situation as well.”
