People need to gear up for higher rates when they kick in, brokers say
Kiwi homeowners should heed Reserve Bank Governor Adrian Orr’s warning to stop spending – or else, they may find themselves sleepwalking their way into financial disaster.
Nick Goodall, CoreLogic head of research, said that it’s because the actual mortgage rates people pay lag the OCR hikes that people on fixed term rates don’t feel the effect immediately, and as result, don’t change their spending habits.
“When you tighten monetary policy, there is a lag effect that doesn’t affect the market straight away,” Goodall told OneRoof. “People are still spending because they still feel wealthier than they did two years ago.
“They’re not registering the fact that ‘oh my god, my house is worth less than it was in November.’ They’re going ‘my house is still 30% more than it was in March 2020. So, I still feel wealthy. So, I'm still spending.’
“The idea that monetary policy tightening is supposed to make you feel less wealthy, so you stopped spending, isn’t working as well as it should in a normal situation, because of their strong growth prior.”
Black Friday week spending data suggest that some Kiwis have heeded Orr’s message, with Worldline payments figures for the Black Friday week overall posting a 9.5% drop from the prior year, excluding hospitality and food/liquor merchants, although it was still up from pre-COVID levels of Black Friday 2019. This year’s Black Friday week saw spending on items such as furniture, houseware, and hardware fall, while spending on a broad grouping of clothing, footwear, and personal accessories went up by 5%.
While theoretically, homeowners should still be able to afford to pay 7% or 8% on their mortgages, as tested by their banks in 2020/21 when mortgage rates were at rock bottom, the reality is that higher interest rates combined with surging prices for basics is too much for some of them to handle.
Even with the test rates, and low unemployment, mortgagee sales are happening – although still rare. In some cases, these are due to unexpected changes in the homeowners’ circumstances, such as one partner stopping work to become a full-time parent. There are also some people who simply can’t rein in their spending, even if on paper they have sufficient income to cover the mortgage, OneRoof reported.
Mortgage advisers said homeowners should gear up for higher interest, adding that those who are adjusting their budgets now will be best placed to handle the financial shock.
Emm McCartney, New Zealand Home Loans Canterbury business owner, had this to say after watching clients failing to acknowledge an incoming cyclone of interest rate hikes: “Wake up, shake up, and take back control.”
“I couldn’t understand why [clients] were sitting on their hands,” McCartney said. “Mortgage rates were increasing, and people should have been reaching out, wanting to take some action and get some control for themselves. But everybody was quiet. They had their heads in the sand about what was happening around them.”
McCartney said it was when she sat down with clients and went through their budgets that she realised they needed waking up.
“You can see by their spending habits that they haven’t woken up,” she said. “They’re not aware of what’s happening in their accounts. When I really broke it down and went ‘wait a minute’, I realised we actually needed to shake some people and say, ‘this is real.’ At least acknowledge it and stop hiding from it.
“Taking control is getting things back to the very basics... That’s where the fairly old-school basics of getting a highlighter and going through all the transactions that you can isolate that portion of waste.
“There is nothing wrong with working out, this is what we’ll spend on our food, fuel, and fun. In some cases, it’s physically drawing that money out and having it in the wallet. And when the wallet’s dry, that week’s spend has been spent. That actually does work.
“A lot of people start to feel they are financially better off once they’re on their spending plan. They don’t have more money. They’re just aware of what they are spending their money on.”
McCartney said that what homeowners should be doing right now was to re-examine their budgets and voluntarily increase mortgage payments in anticipation of the rise, or at least pay into a savings account to ensure they can make the payments when their mortgages roll over. It would benefit homeowners to make the extra payments now to reduce the capital owing.
“Sit down with your mortgage mentor,” she said. “We’ll simulate what [higher] repayments will look like. We will say: ‘this is what it will cost. Let’s start practising now. [Put] that into your savings so you’re not going to get such a shock’.”
Another effective strategy is to allocate part of any pay rise to the mortgage.
“When you get a pay rise and people right now are getting pay rises, to [put] a portion of that into savings because you're not accustomed to that new pay rate yet,” McCartney told OneRoof.
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