When will the full impact of interest rate hikes be reached?

  • The Reserve Bank will update the official exchange rate (OCR) on Wednesday.
  • Inflationary pressures should mean he could choose a 50 basis point hike.
  • This will put pressure on household budgets, which are already facing rising costs of living.

Interest rates are rising – but it may take until the end of the year before the full effect of the rise is felt by households, economists say.

The Reserve Bank is expected to raise the official exchange rate (OCR) on Wednesday, potentially by 50 basis points, taking it to 1.5%, a level last seen in 2016.

Mortgage rates are already much higher than they were the last time the OCR was at this level, which partly reflects the fact that the market expects further increases in mortgage rates. cash are likely.

Major banks are now offering special one-year rates of 4.49% to 5.55%, up from 2.21% in June last year.

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This means that if someone secured a $500,000 loan for one year last June, their repayments over a 25-year term could jump from just over $1,000 a fortnight to $1,281.

Earlier in the year, Reserve Bank analysis showed that if mortgage rates rose to 5%, nearly 20% of recent first-time home buyers would face maintenance issues.

At 6%, this would increase to almost 50%, and investors and some existing owner-occupiers would also be under pressure.

Two-year rates are already above 5% and are expected to rise.

In its latest Financial Stability Report, the Reserve Bank said new borrowers would be the most vulnerable to rising interest rates and falling house prices because they would have repaid less of their loans. and could have seen their ability to repay a mortgage assessed at lower rates. .

“The proportion of subprime loans, meaning loans with both high debt-to-income and loan-to-value ratios, has risen sharply for all three buyer groups in recent years.”

But he said subprime lending to first-time home buyers had fallen in recent months after loan-to-value rules were tightened.

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There are concerns that recent first-time home buyers will struggle to keep up with rising rates.

Kiwibank chief economist Jarrod Kerr said rising interest rates would “put the brakes on” by the end of the year.

He said 60% of mortgages were variable rate or would be fixed within the next 12 months.

“By the end of the year, most of that will be gone, and you’ll have people pegging at 2% or 3.5% all of a sudden fixing much higher than that. There will be stress there by the end of the year.

ANZ chief economist Sharon Zollner said that when an asset turns, people who entered the market most recently are the most stressed about it.

“Overall, the household debt-to-income ratio is not much higher than it was in 2008. Households should be able to handle higher mortgage rates overall. students. The banks tested throughout the process that people could afford higher mortgage rates than the going rate. »

She said that if the OCR hits 3.5%, bank rates would be close to the rate that had been verified.

“Right now there is pressure on the cost of living – no one was expecting 7% inflation when they did these tests, but of course income will catch up.

“Our view is more that the level of property prices is the weakest link in the chain and that will determine how far OCR can go before the wheels fall.”

Mortgage adviser David Windler said he didn’t see anyone in trouble yet. Many borrowers would have fixed for longer terms a year ago, he said.

Another adviser, Bruce Patten of Loan Market, said many people had been told to keep their payments the same when interest rates fell, so they weren’t struggling now.

“I’m sure some people are stressed, but hopefully not as many as the RBNZ assumes.”

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