Interest rate doomsday: How much extra will you pay?
Auckland home-owners may have to pay more than $1000 extra a month on their existing mortgage repayment if interest rates creep up to seven per cent, new data from OneRoof shows.
Wellingtonians could pay nearly $800 extra a month more and borrowers in Tauranga, $600 extra a month.
Ahead of the OneRoof Property Report, OneRoof and data partner Valocity modelled what could happen to mortgage repayments if interest rates move from five all the way up to ten per cent.
Out of the six main urban centres OneRoof looked, Auckland faced the steepest extra repayments while homeowners in Dunedin would be less stressed, with extra repayments of just $202 extra a month at interest rates of seven per cent, and an extra $1097 if rates were at 10 per cent.
OneRoof editor Owen Vaughan said: "Monthly hikes of $1000 (or over $2000 in Auckland at 9 per cent) are based on mortgages on the median values in those towns: people who have borrowed more for more expensive properties would face even steeper payment hikes.
"Right now the rates hike scenarios are hypothetical, and interest rates are at a historical low – but the Reserve Bank has indicated that interest rates could rise in the future, and interest rates of 10 per cent are not unusual in New Zealand.
"If people struggled to pay their mortgages, defaults on loans or face mortgagee sales, or even just cut their consumer spending - what will that do to the economy?"
In 2017, the Reserve Bank calculated that if rates ballooned to nine per cent, seven per cent of borrowers and a significant 19 per cent of recent borrowers would suffer severe stress, more so in Auckland.
The Bank's stress test, part of its regular financial stability report, looked at borrowers' ability to service interest rate of seven per cent and nine per cent, calculated against minimum essential living expenses and the reliability of income sources.
Banks are already doing the math on how well borrowers could cope with a two per cent hike in mortgage interest rates before they approve a mortgage, says John Bolton, head of brokers Squirrel Mortgages.
"People would start to squeal a bit if rates went up to 7 or 8 per cent," he says. "We've all had to too through periods of belt-tightening, if you had to, you'd find a way. You'd take on boarders, cut back on discretionary spending, make better food choices.
"But it's scaremongering to look at 8 or 9 per cent interest without looking at what drives up inflation, where we are in the cycle with consumer confidence and spending."
New Zealand household's high debt levels compared to the rest of the world (93 per cent of GDP, second only to Australia's frightening 121 per cent, according to rating agency Fitch) means our financial system is vulnerable to financial downturns. Householders could well do the same to test their own vulnerability to changes.
"Repayment affordability is more important than ever now that rapid house inflation is behind us," says Valocity's head of valuation, James Wilson. "It is more important than ever to consider both the immediate and long term repayment affordability. Don't just ask yourself, can I afford the repayments now, run your numbers on current and potential future scenarios.
"Property ownership should be a long-term game."