Mortgage pressures put squeeze on repayments

More than two-thirds of mortgage holders say they have or will cut back their overall spending due to the increased cost of mortgage repayments.

Just 22% say they overpay on their mortgages, down from 42% two years ago. However, there’s an important caveat: the number of people overpaying dropped to just 14% at the time Auckland was plunged into its four-month lockdown. This suggests Kiwis buckled down on their finances at that time given the uncertainties.

It’s been a tumultuous couple of years in the property market. Property prices have slumped from eye-watering highs, with the peak to trough fall expected to hit 20-25% by late this year.

While property prices have dropped, mortgage rates have nearly tripled, and lenders’ affordability scrutiny has increased.

Many hopeful first home buyers have had their dreams crushed. There are some signs they are returning to the market, but only slowly.

Interest rates

The report shows that an average two-year fixed mortgage now sits at 6.7%, up from 2.63% two years ago, meaning monthly repayments on a $500,000 mortgage have risen from $2276 to $3439 and for a $750,000 mortgage from $3414 to $5158.

While households have found it difficult to absorb these extra costs plus the rising costs of basics, such as food, many mortgage holders have prepared themselves for the pain of much higher repayments.

Two thirds, or 66%, of mortgage holders say they have, or will, cut back on essential and non-essential items due to refinancing their mortgages.

This figure is split between 45% curtailing spending on non-essential items like dining out, entertainment and fashion, and 21% who are pulling back on essential items, such as groceries, electricity and phone usage.

Of those pulling back on essential items, mortgage holders in their thirties are suffering the most; more than a quarter, or 26%, say they have, or plan to, cut back their spending as a result of mortgage rate increases. This compares to 23% of those in their forties.

And more Kiwis, across a wider age bracket, are cutting back on non-essentials. More than half (54%) of under-thirties say they’re reducing their spending, dropping to 52% of those in their thirties, and 41% of people in their forties.

Not so rich

Mortgage holders are not feeling asset-rich, either. Only 27% of those surveyed say their homes earned more than they did from wages due to capital gains, down from nearly half (48%) two years ago. This figure is set to drop further, as house prices will possibly have further double-digit drops during 2023.

Bullish budgeters

Those surveyed appear to have become more confident in their budgeting abilities, despite rising costs and payday-to-payday living.

This may be a result of the cost of living crisis or, perhaps, people have simply gotten smarter at making ends meet. Either way, more than 60% now say they are living within their financial means, a notable improvement from two years ago when only 44% said the same.

More frugal behaviour is evident as people age; 59% of 18- to 29-year-olds say they live within their means, but 70% of those over 70 say the same.

However, budgeting is clearly tight for many Kiwis with 52% admitting they live payday to payday; 60% of those in the youngest age bracket, dropping to 35% for those over 70. Nearly half of respondents (47%) say they don’t have enough put away to survive for two months without an income, but this is an improvement on two years ago, when 72% felt they did not have the same financial buffer.

Lender changes

The number of borrowers changing mortgage lenders for cheaper rates remains low.

This reflects the difficulty of shifting lenders in the existing environment, where lending applications are heavily scrutinised, and banks are stress-testing applicants at near double-digit rates.

Only 5% of homeowners changed lenders for a lower rate, down from 6% two years ago and only 7% negotiated better rates with their banks.

The number of borrowers who have redrawn on their mortgages has dropped from 11% two years ago to just 6%.

Affordability

In (slightly) positive news, people are less worried about the ability of the next generation to afford first homes. While 46% of those surveyed are worried about first home buyers’ (FHBs’) ability to purchase a house, that’s way down from two years ago, when 57% said the same.

Despite this, the bright line test appears to have tempered appetite for a capital gains tax. Two years ago, nearly a third (29%) of Kiwis supported a capital gains tax, but that figure has now dropped to just 18%.

Debt falls

There has been a big decline in mortgage debt, as Reserve Bank data reveals. FHBs took on $640m in debt during January 2023, compared to $1 billion two years ago. However, a slowing market and fewer investors mean they now make up a higher percentage of the overall market at 23%. The share to investors fell to a record low of 15.4%.

Significant numbers of prospective FHBs appear to have dropped out of the market. In 2021, nearly half (48%)  of 30-somethings said they were potential FHBs. That figure is now 33%. Fewer people in their forties also consider themselves potential FHBs, the percentage dropping from 38% in early 2021 to just over a quarter now.

Saving to buy

One notable shift is the increased number of people who say they’re relying on KiwiSaver to support the purchase of a first home. It’s increased from 54% two years ago to 73% now.

Meanwhile, the percentage of potential FHBs planning to draw on family financial assistance has dropped from 31% to 11%.

Interestingly, prospective FHBs are more bullish in their belief they can save a deposit within a short time frame. Two years ago, only one in 10 believed they could save a deposit within two years. Now, 16% believe the same, while more than one in five (22%) believe they can do it within three years.

At the other end of the scale, just 7% believe it will take more than 10 years to save a deposit, down from the record high of 11.8% in the first quarter of 2022, but is far higher than the long-term average of eight years.

Of those who are saving for a first home, 24% are putting away less than 10% of their income. Another quarter are saving between 10% and 20% of their income, while another 20% are saving between 20% and 30%.

Home love

Despite the softening property market, people remain bullish on property prices.

Nearly a third, (29%) expect house prices to rise steadily, while only one in five (20%) expect property values to ease further.

Nationwide, average mortgages are about $254,000, although they sit at about $327,000 for Aucklanders.

We love our big houses; 49% of us own three or four-bedroom, detached houses. Another 5% own detached houses with five or more bedrooms.

On average, people believe their homes are worth just under $678,000, although that figure rises to nearly $767,000 in Auckland.

There’s also a gender split; men put a higher value on their houses than women do, at $710,000 and $650,000, respectively.

Those who can afford property are still investing, but have pulled back. Investors in Canstar’s survey say the number of properties they own has dropped, from two properties in 2021 to an average of 1.3, each property with an average mortgage of around $266,000.

The size of homes:
1-2 bed apartment (9%)
3-4 bed apartment (13%)
5+ bed apartment (2%)
1-2 bed detached house (8%)
3-4 bed detached house (49%)
5+ bed detached house (5%)
1-2 bed townhouse (4%)
3-4 bed townhouse (7%)
Studio apartment (1%)
Other (2%)