Mortgage interest payments rising rapidly

It is the highest since collection of the data began in 2014.

In the March quarter last year just $2.47 billion was charged in interest, the latest Reserve Bank residential loan reconciliation figures show.

This was at a time when many mortgage borrowers were paying interest on their loans of between 2-3%. A year later, and with 12 consecutive hikes to the official cash rate (OCR) to 5.25% and another 25bps hike expected this month, leading to interest rate hikes, the record amount paid in interest-only is expected to increase again.

The New Zealand Banking Association says while the Reserve Bank is raising the cost of borrowing to help fight inflation, people are starting to borrow less. That’s also a reflection of the property market. “Many households are doing it tough in the face of the rising cost of living,” says Roger Beaumont, the association’s chief executive.

The association’s six monthly data insights show that at the end of December there were nearly 1.26 million home loans across 1.09 million customers. The average value of all home loans was $316,019. Of the 45,628 new home loans opened, 26.1% were issued to first home buyers.

Rolling off lower to higher rates

Another factor in the rising figures is borrowers rolling off low fixed interest rates onto much higher rates, although a couple of banks have lowered their three-year fixed rates to below 6%.

Banks expect to be able to start lowering interest rates across the board by the end of this year/early next year if the Reserve Bank pauses its OCR rate hikes after this month’s expected increase. 

While the total interest being paid is up, the RBNZ March quarter figures show the total amount drawn down by mortgage borrowers has dropped to $14.507 billion – the third lowest for a calendar quarter since data collection began.

The only time it was lower than this was in June 2020 when $14.456 billion was drawn down and September 2014 when $13,951 billion was taken out by mortgage borrowers.

Although interest rates payments are going up, there is little sign that financial stress levels are becoming an issue.

The scheduled payments bill hit a high in the March quarter of $6.121 billion. The payments deficiencies figure was up to $220 million, up $6 million on the December quarter.

Switching payment types

Beaumont says it has been interesting to see that 12,120 home loans switched from principal and interest to interest-only repayments in the December quarter. That’s just a small fraction – less than 1% – when compared to the total number of home loans.

“There has also been a drop of nearly 10% in home loans on variable interest rates, which suggests borrowers are looking for more certainty in the existing market. Now about 17% of home loans are on variable rates, he says.

However, the number of borrowers who were ahead on their mortgage payments in the RBNZ’s March quarter figures has slipped to the lowest level in four years to sit at $3.38 billion, down from $4.2 billion in the December quarter and from a peak of $4.4 billion in the June quarter last year.

Beaumont says it shows that many people took advantage of interest rates when they were at historic lows. They likely retained their repayments at the same level as before, or increased them, to help repay their loans faster and save on the overall loan cost. It also means that nearly half the people with home loans had built in a buffer that has effectively cushioned the impact of higher interest rates, which we’re now seeing. “It’s a double win for them.”

Other data

In the Reserve Bank’s other mortgage data, total monthly borrowing in March across all borrower types was $6 billion, up 57.4% or $2.2 billion on February. This was the first time since November last year that borrowing exceeded $6 billion.

This $6 billion of borrowing faded into obscurity when compared to the $10.7 billion borrowed in March 2021 and $7.3 billion in March last year.

Across all borrowers, March’s average mortgage value was $362,400 up 8.3% from $334,500 in February. This data hit a low of about $320,00 in January.