The price people pay for higher mortgage rates

New figures from research by ASB Bank show households staggering under the pressure of rising interest rates.

Sunday, December 11th 2022, 7:24PM

by Eric Frykberg

They show highly indebted borrowers needing to find hundreds of dollars more each week to pay their mortgage.

ASB senior economist Mark Smith said the average rise in household debt servicing costs would be $80 per week by the end of next year and $100 by the end of 2024.

This would work out at $8 billion and $12 billion more in household debt servicing costs respectively for the nation as a whole.

But the impact would be felt unevenly through the economy, as some households did not have debt, and others were highly mortgaged.

“Our concern is that the households who have built up savings post-Covid may not be the ones who need to find additional funds to cover higher debt servicing costs,” Smith wrote.

“For many other borrowers, increases in debt servicing costs will be sizable, running into the hundreds of dollars per week.”

Smith said the average duration for mortgage loans was around 13 months with about half of all loans likely to be repriced over the next 12 months.

“With debt servicing costs sharply on the rise, borrowers who have racked up a considerable amount of debt face an unpleasant surprise,” he said.

Smith quoted RBNZ figures showing a person could have fixed a loan for two years at the end of 2020 at 2.59%. When it is refixed at the end of this year, that person will pay an equivalent rate close to 6.75%.

On a mortgage of $500,000, those payments would be an extra $300 per week.

The money left over after paying those higher rates would not go so far either, since inflation would be pushing up a wide range of essential goods elsewhere in the economy.

The average mortgage for a first home buyer was $600,000.

And the cost of paying that debt at higher rates of interest would rise by four percentage points between 2022 and 2024.

Smith also quoted RBNZ figures showing the stock of household debt was $340 billion, which was just under 175% of household disposable incomes and slightly more than 90% of nominal GDP.

Tags: ASB