Canny View: Is mortgage shock setting in?

OPINION:
It’s the moment many will have been nervously anticipating since rates started to rise in June last year – those who chose the cheapest rate on offer, which happened to be a 12- month term,
will be refixing their terms.

In June last year, it was possible to take out a mortgage at a fixed rate of about 2.2 per cent from the big banks. The rates right now are sitting at 5.2 per cent for a fixed 12- month term, and 5.6 per cent floating.

While home loan experts are saying rates won’t get as high as first predicted – and even going so far as to say they have already peaked between 5-6 per cent – that will be cold comfort to those who are already having to find a sizeable chunk of spare change to keep up with their payments.

Recent data from ANZ indicates there’s not much reason as yet for the Reserve Bank of New Zealand to slow its aggressive interest rate rises. According to its Data Wrap, ANZ anticipates further cash rate hikes towards 3.5 per cent in November in order to truly contain inflation.

In the meantime, several big banks have started lowering their rates. BNZ revealed recently that its Classic two-year fixed rate would be dropped from 5.69 per cent to 5.39 per cent. Westpac and ANZ have also lowered their rates, albeit not quite as much – their new rates offerings sit at 5.45 per cent.

In fact, there has been a lot of movement from big banks to make taking on a home loan more palatable. The appeal with taking on a massive loan in recent years was the low rates. Without these, banks are starting to push ideas like co-ownership, sustainability- linked loans and even cashback promotions on new loans.

No longer just a promotion on a new TV or a car – now you can get cash back on your house! Of course, it’s only about 1 per cent of your loan or less, and only under certain conditions.

BNZ is offering up to $20,000 cashback, with Kiwibank offering up to $10,000 and Westpac taking a different approach with five prizes of $50,000 to be drawn. It’s a classic marketing tactic designed to incentivise spending by offering a “reward” for doing so.

Unfortunately, there’s no such thing as a free lunch.

Home loans are products sold by banks. Like any business, banks will want to keep selling high-earning products (loans) to maximise their profits and keep shareholders happy.

Hence, the alternative appeals to many, like co-ownership between friends or families. Kiwibank launched its Co-own option, which it markets as a way to help people “turn the dream of owning a home into reality by teaming up with friends or whānau”.

It’s certainly achievable for some and offers a refreshing change from the marketing aimed at couples, but it also seems to hint that even the banks have given up on the average person owning their own home at this point.

Then there’s the elephant in the room – or more accurately, the bull in the china shop – that is the cost of living underpinned by rampant inflation. The prolonged impact of higher interest rates on those with home loans (and those trying to save a desposit) will result in less discretionary income, and therefore less spending. Hardest-hit industries are likely to be the same ones that have been struggling the past few years; principally tourism and hospitality.

This is why RBNZ is being so heavy handed with the OCR. It wants to get inflation under control as quickly as possible, and is choosing short, sharp pain for long-term gain.

Globally, we can see the bubbliest housing markets are starting to deflate. Bloomberg Economics recently released an analysis of 19 OECD countries showing their combined price-to-rent and home price-to-income ratios are higher at the moment than they were before the infamous 2008 financial crisis. New Zealand is at the top of the risk ranking, as our traditional FOMO turns to FOOP – fear of overpaying.

This is where we need to exercise caution when hearing gloomy headlines about the state of the markets. There will surely be more problems ahead – we haven’t seen a stable period in world history yet. How markets react to events is always tough to know. If we react to them, it creates a decision-making chain. It’s hard enough to be right once and it’s near impossible to be right twice.

It’s a good idea to spend some time checking on your progress, reviewing your investments and making sure you’re getting all the KiwiSaver benefits. Sitting down with a trusted financial adviser is the best place to start.

• Nick Stewart is a fFinancial adviser and CEO at Stewart Group, a Hawke’s Bay and Wellington-based CEFEX-certified financial planning and advisory firm.

• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz

i https://www.interest.co.nz/charts/interest-rates/fixed-mortgage-rates ii https://www.nzherald.co.nz/business/mortgage-rates-arent-going-to-get-as-high-as-expected-home-loan-expert/UK4J3MAOX5W6DUGCQ75V766IKQ/ iii https://www.1news.co.nz/2022/07/06/major-banks-cut-two-year-mortgage-rate/ iv https://www.stuff.co.nz/business/opinion-analysis/129173168/banks-big-home-loan-cashbacks-mask-attempts-to-rebuild-margins v https://www.kiwibank.co.nz/personal-banking/home-loans/getting-a-home-loan/co-own/ vi https://www.bloomberg.com/news/articles/2022-03-16/fear-of-overpaying-replaces-fomo-in-cooling-kiwi-housing-market vii https://www.bloomberg.com/news/features/2022-06-21/cooling-real-estate-markets-in-us-uk-risk-deeper-global-economic-slump?cmpid=BBD062222_OUS&utm_medium=email&utm_source=newsletter&utm_term=220622&utm_campaign=openamericas