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Impact of higher interest payments hits home for more borrowers

July 10, 2023
in Business
Impact of higher interest payments hits home for more borrowers
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beautiful neigborhood with houses. Location: New Zealand, capital city Wellington

About 50 percent of all mortgages are expected to be repriced this year. File photo
Photo: 123RF

Households are expected to spend more money on debt servicing costs as many borrowers roll onto higher mortgage rates, a Westpac economist says.

An economic update from the bank said an increasing number of borrowers were now rolling onto higher mortgage rates, with about 50 percent of all mortgages forecast to be repriced this year, likely at higher rates.

“For instance, borrowers who fixed their mortgage for two years back in May 2021 might have secured a rate of around 2.6 percent,” senior economist Satish Ranchhod said.

“But when those same borrowers go to refix now, they’ll be looking at a rate of over 6 percent.

“To put that in context, if you purchased an average priced home in most parts of the country with an 80 percent mortgage two years ago, the rise in interest rates could add around $900 to your monthly mortgage payments.

“In Auckland, where house prices tend to be higher, that rise in mortgage interest costs could be closer to $1600 per month.”

It comes amid increases in household spending on debt servicing, with recent data from Stats NZ showing households were spending, on average, 7.5 percent of their disposable income on interest payments each quarter, up from a low of 5 percent at the end of 2021.

“That’s still relatively low compared to prior to the pandemic when interest costs accounted for around 10 percent of household spending,” Ranchhod said.

“However, we should keep in mind that these costs are not evenly shared as only around one-third of households have mortgages.

“Data from the RBNZ’s last Financial Stability report showed that households with mortgages are already spending around 15 percent of their income on interest payments.”

Discretionary spending had “actually held up fairly well so far”, Ranchhod told Checkpoint.

“But I think the pressure really is going to come on in the next 12 months. You’ve already got a cost of living crisis, add in some mortgage pressure, it could be tough times for a lot of families.”

A lot of households were having to spend a lot more, and getting less bang for their buck, he said.

This was especially the case for families on lower incomes, who were spending more on necessities like food and utilities, he said.

“For the average household, as they deal with those cost pressures, we think they are going to wind back their spending over the coming year. If you think about the average amount of goods that you’re taking home on a weekly basis, it’s probably going to fall by about 2 percent in the few years.

“That’s a pretty big contraction because that’s about 60 percent of the economy that’s accounted for by household spending. I think that’ll be an important drag in economic activity over the next couple of years.”

Ranchhod thought we would see the economy going sideways in the next couple of years.

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