How much will mortgage repayments cost as rates rise
Mortgage rates are on the rise and that means homeowners should be prepared for a big increase in their monthly repayments.
The emergency monetary stimulus provided by the Reserve Bank when Covid first hit pushed already low mortgage rates to historic lows.
But last year, the Reserve Bank began reversing that stimulus and raised the official exchange rate (OCR) from 0.25% in August to 0.75% in November.
Next week he will issue his first monetary policy statement of the year, and there is strong consensus that he will raise the OCR by 25 basis points, to 1%.
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And most economists don’t expect it to stop there. ANZ and Westpac economists are picking OCR to hit 3% by the middle of next year.
For homeowners, this means that mortgage rates have already risen sharply from the low to mid 2% range at the end of last year.
Standard one-year fixed rates at the big four banks and Kiwibank now range from 3.85 to 4.54%, while standard two-year fixed rates range between 4.15 and 5.20%.
Further hikes are expected, although there are question marks over their magnitude, as economists say markets have already forecast a substantial number of hikes over the next few years.
But what does this mean for the average homeowner and their monthly repayments?
Based on typical mortgage rate forecasts here, we calculated the numbers on what homeowners are likely to pay, using the amount owed at $100,000. This allows for easy multiplication by the value of individual mortgages.
The typical forecast is that the one-year fixed rate will hit the low 5% range over the next two years. Economist Tony Alexander predicts that the one-year fixed rate will be 4.75% next February and 5.25% in February 2024, for example.
Mortgages Online director Hamish Patel says many people exiting their current mortgage terms this year have rates around 2.5%. At this rate, monthly repayments on a $100,000 loan over 30 years are $395.
But if the rate goes up to 4.50%, the monthly repayments amount to $507. At 5.0% they are $537, and at Alexander’s forecast of 5.25% they will be $552.
When this is applied to the national median price, which the latest Real Estate Institute figures put at $880,000 in January, it shows just how big the increase can be for those with large loans.
Assuming a 20% deposit for a home loan at the national median price, monthly repayments at 2.50% would be $2,782. If the rate went to 5.25%, monthly repayments would be $3,888.
Of the major centers, Auckland has the highest property prices. The current median price in the area is $1.2 million, according to the Real Estate Institute.
With a 20% down payment, the monthly repayments of the 2.50% loan would be $3,793. At 5.25%, they would rise to $5,301.
While the repayment increases are significant, Patel says most mortgage holders will be able to manage rates of 5% as banks test borrowers’ ability to make repayments at a higher rate. But that means there will be less spending in the economy.
Alexander also says he’s confident most people will get by, although they might be shocked at the amount of expenses for things like restaurant meals they have to cut to cover the rising costs. .
But CoreLogic released its latest housing affordability report on Friday, and it showed a sharp rise in mortgage repayments, with households taking out a new home loan now having to spend 48% of their income paying off an 80% mortgage.
CoreLogic’s chief real estate economist, Kelvin Davidson, said another 0.5-0.6% increase in a typical mortgage rate would take that affordability measure to the worst level on record.