Could you stay afloat if banks increase home loan rates?

Co-author: Justine Davies 

In a reverse of the age-old “What goes up, must come down” saying, it is highly probable New Zealand’s current low home rate environment will not stick around forever and that increases are on the cards. We take a look at why, and how that relates to mortgage stress

Currently, the Reserve Bank of New Zealand  (RBNZ) is consulting on banks’ capital adequacy. A bank’s capital can be thought of as how much money it holds as a buffer, should there be a downturn in the economy. RBNZ believes banks’ capital level requirement needs to increase. And some commentators say this could then have a flow-on effect for homeowners/would-be homeowners, with banks increasing home loan interest rates, in order to help build up this capital buffer.

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How could home loan rate increases impact homeowners?

It’s really important to ensure that you could not only afford home loan repayments at current interest rates, but also at any potential increased rate.

The median house price in New Zealand is $560,000 and the median Auckland house price is a staggering $862,000, according to the Real Estate Institute of New Zealand’s (REINZ) latest residential statistics.

So, while a percentage or two doesn’t sound like a big deal in it’s own right, when applied to these large numbers, it can have a big impact on mortgage repayments.

This makes it even more important for house buyers to be aware of what they are getting into when it comes to repaying a home loan, what the current rates are and whether you could afford to make repayments if those rates increased.

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What is mortgage stress, how does it relate to home loan repayments?

Mortgage stress does not have a concrete definition but, in New Zealand, the term is used when more than 30% of your-after income tax is spent on home loan repayments. While this isn’t a perfect science, it’s a relatively reliable way of diagnosing mortgage stress. The good news is that mortgage stress in New Zealand seems to be abating, no doubt with thanks to the Reserve Bank’s determination to cool the property market. This has been helped by the LVR limits introduced by the Reserve Bank in October 2013 – and since further adjusted -to curb inherently risky high-LVR lending practices.

How do I avoid mortgage stress

To avoid mortgage stress, you have to be aware that there are some uncontrollable factors such as home loan interest rates and costs of living. Keeping this in mind, there are a handful of ways to combat mortgage stress, or avoid it in the first place.

1. Be realistic with your spending

To begin with the obvious, not spending beyond your means when you first buy a home is the easiest way to avoid future mortgage stress. Buy a home that will result in loan payments that you can comfortably make – everyone wants a big shiny house, but your financial security must always come first.

2. Plan for the worst

If you suspect you might ever fall victim to mortgage stress, it’s important that you have income insurance arranged for in case of unemployment, or inability to work caused by illness, trauma, or even death.

3. Reconsider your need to buy

If the market isn’t favourable at the time you’re looking for a home, and your only option is to spend more than you had planned on, it’s important that you think long and hard about whether or not you need to buy a home.

6 ways to cut your weekly spending:

	Make a budget
	Plan ahead for meals
	Make coffee at home
	Resist the sales!
	Research Home Loan rates
	Skip the restaurant – make a home feast!

If you are looking to buy, make sure that you don’t pay more for your mortgage than you have to. You can compare home loans on Canstar’s database here.

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