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House prices, mortgage rates and mortgage lending

In this blog, we look at the changing face of mortgages in New Zealand. We look at why it feels like it’s getting harder to get a mortgage, how people with mortgages can find certainty in the face of a changing OCR and increasing interest rates, and a strategy for staying on top of your mortgage.

Why is it feeling harder to get a Mortgage?

Turn on the 6 pm news and you’re likely to see another report on how quickly house prices are increasing. Property prices in New Zealand have almost become a running joke, but the ones laughing tend to be the ones who are already on the ladder.

Over the last 12 months, we’ve seen the average price of a house in Aotearoa increase by 27%. That means if you bought a house for $1,000,000 twelve months ago you may well be staring down the barrel of $270,000 in capital gains.

This is wonderful news for people with property, but it’s devastating for people without and particularly for first home buyers. The price of a home is increasing at a rate that is far outstripping people’s ability to increase their earnings which makes it seem like fulfilling that first home dream is almost impossible.

A lot of our clients are experiencing the challenges increasing property prices are creating for people looking to buy their first homes. It’s disheartening to hear stories of people who thought they had saved enough only to find the drastic increase in house prices means they are now unable to afford what they thought they could just a few months earlier. We so often have clients coming back and asking us to increase their pre-approvals so they can afford to buy something.

There are changes on the horizon in the form of the Credit Contracts & Consumer Finance Act (CCCFA) which is due to arrive on the 1st of December. It’s going to lead to the biggest overhaul of banking policy we have seen in over 8 years. We’ve included a summary of key points below but to summarise this Act is going to increase the level of scrutiny from banks in regards to mortgages. This is being done in the hopes of reducing the risk of people defaulting on their mortgages due to the increased amount of debt most people are taking on to secure a home.

Here is a quick summary of the key points:

• Banks will need to be able to prove they have undertaken the necessary steps to prove consumers can afford the lending, so you can expect them to take a deep dive into your day to day expenses. Be particularly mindful of using buy now pay later services like Afterpay as these will decrease the amount you can borrow from a bank.
• Sources of income such as flatmates, boarders and rental income are being scaled back sometimes to as little as 65%.
• Cutting back on interest-only lending even on investment properties or restricting it to the 60% loan to value ratio.
• Older borrowers are finding it more difficult to borrow due to having to explain their exit strategy in greater detail.
• Bank funding for borrowers with less than 20% deposit has been cut by half. Banks are now only able to lend out 10% of their overall lending to clients who don’t meet the 20% deposit requirement. For first home buyers this makes getting a loan even harder, and often only the bank they currently bank with is willing to offer this lending.
• Due to the halving of these funds the banks have increased the income benchmark for clients to qualify for the lending so now only higher-income households will qualify.
• There are talks of increasing debt to income ratios with one bank already implementing this and the others unofficially beginning the process behind the scenes. Debt to income ratios specify that you can only borrow six times your household income, so if you have a household income of $100k you can only borrow $600k.

Is it possible to find certainty as interest rates rise and the OCR changes?

For some borrowers, the recent rise in interest rates may have come as a surprise because most people expect an increase in interest rates to be triggered by a change to the Official Cash Rate (OCR). But the fact remains that every fortnight since mid-July we have had emails from all the main trading banks saying that they are increasing their rates.

To be fair we have had our first two increases in seven years to the OCR. The first was due to the pandemic on October the 6th when it went up by 0.25%, and the second 0.25% increase was on November the 24th. Economists are predicting that the OCR will hit 1% in the next 6 months and reach a high of 3% by late 2022. All of this means that we can expect to see further increases to interest rates, likely 4%-5% for 1-year rates. The reality is that it’s unlikely for them to go higher than 5% as if they were to hit 6% then mortgage payments would account for 51% of gross household income, the worst level in 18 years and something that would be unaffordable for the country.

With the above in mind, we’ve taken a look into the crystal ball and our mortgage rate predictions at Money Men HQ are:

2021 – 2.55%
2022 – 3.75%
2023 – 4.5%
2024 – 4.4%
2025 – 4%

4% may seem high to those borrowers who got their first mortgage when rates were at an all-time low but in reality, it’s still very low and represents good value for the borrower. If you don’t believe us just ask your parents about the interest rates they had when they bought their first homes.

If all of this talk of increasing OCRs and mortgage rates is keeping you up at night then we’d suggest you think about fixing your interest rate for a longer period. We expect that in the medium-term rates are only going to go up, and as such we believe that by fixing now you will lock in a lower rate and therefore reduce your overall mortgage payments.

The Money Men Mountain Trek – Saturday the 20th of November

Mental health has become an incredibly important and topical point in New Zealand recently, and it’s something that we couldn’t be prouder to support. We know from our work, and the research out there, that there is a direct link between financial health & mental health, and we know that right now with everything that is going on in the world how important it is to keep talking about the subject.

We are long-time supporters of The Movember Foundation and believe in the work they do to increase awareness around men’s health – and in particular men’s mental health. This year the whole team got involved, and we couldn’t be prouder of the money we raised for this great cause.

Our team and a bunch of other great New Zealanders walked up Mt Eden 46 times in one day. This summit walk is 196m, so by doing it 46 times we equalled the elevation of Mt Everest at 8,848m. We did it to raise money for a great cause, to encourage people to reach out to their friends and whanau, to start conversations about checking in on loved ones, and to encourage people to get out into this beautiful country and enjoy the fresh air and great outdoors.

We started early and finished late in our effort to “move for Movember”. Thank you to everyone who showed up and supported us and this cause. Whether you did 1 lap, 5 laps, 10 or the full amount, or even just showed up for a chat, it was truly appreciated.