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The Day Of Reckoning Nears

Many borrowers will face economic stress as they are forced to pay higher interest rates in the next 12 months, writes Sally Lindsay.

By: Sally Lindsay

1 July 2022

Thousands of borrowers will come up against much higher interest rates when their mortgages roll off fixed interest rates over the next year.

About $160 billion in fixed-rate housing loans come up for review in the next 12 months.

Many borrowers will be forced to pay much higher interest rates, some from 2.5 to 5 per cent, and face economic stress. Even further pressure will go on the mortgage market after the latest OCR hike.

Independent economist Tony Alexander believes interest rates will go higher quicker. He is picking the OCR will peak at 3.5 per cent, floating interest rates at 7 per cent, while one-year fixed rates will rise 1-1.5 per cent. House prices will fall 10 to 15 per cent on average. Mortgage rates have increased rapidly in the past 12 months, with fixed mortgage rates at the one and two-year horizon increasing by more than 225 basis points.

Reduced Demand

This has reduced demand from prospective buyers, especially in the context of high house prices.

As a result house sales have dropped, causing the stock of homes on the market to rise as some homeowners continue to list their properties. Gradually, says the Reserve Bank (RBNZ), sellers will adjust their price expectations lower to find buyers, or withdraw listings.

However, people who first borrowed during 2021 will find it more difficult to service debt.

The RBNZ’s projection for the OCR implies that one and two-year fixed mortgage rates will reach about 6 per cent in the next year.

“If mortgage rates rise as forecast there is a risk that a noticeable number of households that borrowed for the first time in 2021 will find it difficult to pay their mortgages and cover all their other usual expenses,” says the central bank.

This is because a 6 per cent mortgage rate is close to the level at which borrowers were tested during the Covid-19 period. There is a risk that these borrowers will need to cut back spending by more than currently assumed to meet their higher debt-servicing costs.

Higher interest rates, says the bank, will reduce the disposable income of most mortgage holders, lowering household spending.

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