Borrowers can handle higher interest rates: ASB

With forecasters predicting rate hikes next year, economists are pondering the effect on households if mortgage interest rises.

ASB's team, including senior economist Mike Jones, say most households will be able to bear the impact of higher mortgage interest, with household gearing and serviceability metrics at relatively low levels.

However, the bank says new entrants to the market could face a household squeeze.

"A simple stress test shows debt servicing costs for these borrowers could rise above 50% of disposable income if mortgage rates really shot up," the bank said.

After crunching the numbers, the ASB team believes mortgage rate increases of 1% would suck $3 billion out of mortgage holders' pockets each year.

ASB also pointed to re-set risk among Kiwi borrowers, with 77% of all mortgage debt currently on terms of less than a year.

Households could also see the value of their home fall amid rising rates.

ASB's team followed Westpac in predicting lower prices if mortgage rates rise.

"Higher mortgage rates over the coming years are also a key factor behind our view house price inflation will slow down from here. A scenario in which mortgage rates rise faster than we’re expecting could produce small quarterly falls in house prices," the team said.

The comments come as short-term rates fall to record lows amid RBNZ support. However, longer-term rates more closely linked to wholesale bond markets have edged up significantly in recent months.