Source: Cotality
Growing numbers of NZ mortgage holders are set to face higher financing costs over the next six to 12 months, after a previous period where they got used to lower rates at each fixed loan roll-over.
New analysis from Cotality NZ shows borrowers who benefited from falling mortgage rates and short-term fixing strategies over the past two years or so are entering a more difficult financing environment as market interest rates rise.
Cotality NZ Chief Property Economist Kelvin Davidson said the change marked a significant turning point for mortgage borrowers after an extended period of falling rates.
“Over the past two years, many borrowers were rewarded for staying on short-term fixed rates because they could repeatedly reprice onto lower rates,” he said.
“That strategy has become much less effective as market mortgage rates rise ahead of any medium term OCR increases.”
Although the OCR has not changed (yet) so far this year, wholesale funding costs, inflation expectations and geopolitical uncertainty have all pushed market mortgage rates higher in recent months.
Mr Davidson said the increase in market rates was already influencing borrower behaviour.
Reserve Bank lending data shows floating and short-term fixed lending has become less popular over the past six months, while the two-year fixed rate has become the single most popular lending term, accounting for 29% of new lending in March.
“Borrowers are increasingly prioritising repayment certainty again as refinancing conditions become more uncertain,” Mr Davidson said.
“Many households that previously focused on staying flexible are now weighing up whether rates could move higher over the next one to two years.”
The analysis also found borrowers who fixed on very short durations more recently are already beginning to face higher refinancing costs.
Homeowners who fixed for six months in October at around 4.8% would now face a two-year rate (if they chose that term) roughly 30 basis points higher at 5.1%.
Mr Davidson said many borrowers had already missed the trough in mortgage rates.
“Current market pricing suggests more borrowers refinancing later this year are likely to move from older, lower fixed rates onto higher prevailing market rates,” he said.
The Reserve Bank’s stats shows that around 43% of existing debt is floating or fixed and set to reprice within the next six months, exposing a large cohort of borrowers to changing conditions.
Mr Davidson said the loan repricing cycle could increasingly have an impact on the country’s broader economic activity.
“Higher mortgage costs reduce disposable income and place additional pressure on household spending at a time when economic conditions are already fragile,” he said.
“That creates a more complicated environment for the Reserve Bank as it weighs inflation pressures against weaker growth and softer consumer demand.”