Mortgage interest rates: Big step up predicted

Mortgage interest rates could be pushing 4% by the end of next year – on one and two year rates – and 4.5% into 2023, says CoreLogic.

Thursday, October 07th 2021

These rates are still low by past standards, but a large proportional increase from existing levels.

The major trading banks have already started increasing interest rates since the Reserve Bank’s lifting of the official cash rate (OCR) this week by 0.25% to 0.50%. A clear indication it would have been increased in mid-August had it not been for Covid lockdowns.

ANZ, the country’s largest bank, will increase its floating and flexi home loans by 0.15% from October 12 for new loans and from October 26 for existing loans.

Kiwibank says it will pass on the full 0.25% OCR increase to mortgage borrowers, although it has pointed out its rates are still below other major banks.

ASB says it will hold rates.

“A far bigger shock would have been no change to the OCR in light of continued strength in economic data,” says Kelvin Davidson, CoreLogic’s senior economist.

The Reserve Bank has indicated it is likely the OCR will rise another 0.25% in November. Thereafter it could increase to about 2% by the second half of 2023.

“Higher mortgage rates clearly mean borrowers are going to have to divert more money towards paying their mortgage, and some may not be able to access as much home finance as before,” says Davidson.

“Either way, this is another headwind for the property market, in addition to regulatory changes such as tighter loan-to-value ratio rules and the phased removal of interest deductibility for investors.”

He says there is already the sense some property deals have started to get a little stuck, with buyers just pulling back a little but vendors not budging on the asking/reserve price.

“A tricky period to negotiate is still ahead, but recent events haven’t materially altered the property outlook.”

Reserve Bank data shows total monthly new mortgage lending for August was $8.2 billion, down $0.7 billion on July.

However, the value of new mortgages was 20.4% higher than August last year, with the increase coming from larger average loan sizes.

The bank’s monetary policy committee in its statement about the OCR rise says a number of factors are expected to constrain house prices over the medium term, including rising mortgage interest rates.

As monetary stimulus is reduced, rising interest rates will constrain house prices to a more sustainable level.

CoreLogic’s view is sales activity and price growth are close to, or at, a peak and that both will ease for the rest of this year and into next year.

However, says Davidson with unemployment low and in the absence of a global financial crisis-style credit crunch, a full-on property downturn still seems unlikely – especially since the expected end point for interest rates will still be low by historical standards.


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