Thousands of homeowners are exposed to financial distress as mortgage rates rise
Taupō’s mortgage maestros have advised those who were not prepared for mortgage rate hikes to consider reducing spending in other areas or offer rooms for rent to bridge the gap.
This as fears that thousands of homeowners will be tipped into financial distress by rising mortgage rates, as the Reserve Bank works to combat inflation.
Read more: RBNZ's biggest hike in 22 years sounds inflation warning
At present, the interest rate on a standard two-year mortgage is 5.85% at ANZ, 5.25% at ASB, 5.25% at BNZ, 5.69% at Co-operate Bank, 6.19% at Kiwibank, and 5.79% at Westpac, according to interest.co.nz.
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Wendy Yorke, Mortgage Link Taupō owner-director, said people need to look at other areas of their spending, as there is little they can do about rising interest rates.
“I was at a conference last Friday where they said 50% of mortgages in New Zealand are going to come up for refixing in the next 12 months," Yorke told NZ Herald. “A lot of people are around 2% or 3% interest rates so they could see those doubled. There's nothing anyone can do, so people will obviously have to look at their spending and adjust their habits to cope.”
Yorke said although the interest rate hike was predicted, it has come around faster than expected.
“You could fix shorter term at a lower rate, but then you run the risk of it being higher still when that term is up,” she told NZ Herald. “They think it will take a couple of years to get inflation under control. So, it sounds like rates will be quite high for some time.”
Yorke said the worst thing anyone with concerns about their mortgage interest rate going up can do is ignore it.
“There's definitely worry about the rate getting up to 7 or 8 [per cent],” Yorke said. “Whether it does, I hope not, because the government doesn't want to see everyone in a mortgagee sale situation, they don't want to destroy the economy. People will look at other measures to help, like getting a boarder or flatmate, and if people are distressed they can do interest-only for a period of time. The banks are flexible on that sort of stuff because it's only temporary. Talk to the bank or an adviser as soon as possible to come up with a plan of attack. There are options.”
Nicole Drought, Zest Brokers Insurance & Mortgages Taupō financial adviser, said her clients anticipated – and were mostly prepared for – the increase in interest rates.
“There are definitely people getting a shock. Interest rates are going up because inflation is out of control, it's an attempt to slow spending and therefore reduce inflation,” Drought told NZ Herald. “I've been preparing my clients for this during the last year or two, so it's not a big surprise, and 99% of them are okay. With new purchasers, it's looking at what their payments would be at a higher rate and being prepared for that. I do understand that the majority of people elsewhere will be getting hit with it. It's just one of those things, interest rates are out of our control and we have had a false sense of security during the last five years with these record-low rates.”
Drought said people need to take responsibility for their spending.
“I think some people have forgotten the true cost of a mortgage because the rates have been so low,” she said. “A little over 10 years ago the floating interest rate was 11 or 12 per cent, before that huge drop. To people coming into the market in the last couple of years with 2 per cent interest rates, it feels like that's what the norm is, so they're getting a big shock. I've tried to educate clients that this is not the norm and it was only a matter of time before they came back up.”
Drought advised those with concerns about refixing to look at their discretionary spending and talk to an expert if possible.
“Things just have to get cut if you want to afford the increase. Of course, you can shop around too, make sure you're getting the best rate possible,” she told NZ Herald.
