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MNI BRIEF: RBNZ Warns Of Mortgage Pain As Rates Rise

(MNI) Perth

The Reserve Bank of New Zealand has warned that some households with soon-to-mature fixed rate mortgages may face servicing difficulties if rates rise further, according to its Financial Stability Report released on Wednesday.

Ahead of the Bank's Nov 23 meeting -- when a 75bp hike could be on the table -- the report said around half the stock of mortgages on fixed rates are expected to reprice in 2022, upping serviceability pressure on borrowers. The value of new mortgages from 2020 and 2021 were estimated at around 40% of the current mortgage stock, with 10 percentage points of this being first home buyers. (See MNI BRIEF: CPI Shock May Push 75bp Hike On To RBNZ Radar)

The RBNZ estimates that at average mortgage rates of 5% the debt servicing ratios of the majority of 2021 borrowers would remain below 40% of their after-tax income. However, if mortgage rates rise "significantly" higher than 6%, it is "likely" that an increasing number if borrowers will "need to reduce discretionary parts of their consumption to continue to service heir mortgage." (See MNI BRIEF: RBNZ's Orr Warns of Stress Risk As Rates Rise)

At an interest rate of 7%, the RBNZ estimates around 46% of 2021's mortgage borrowers would need to spend at least half of their after-tax income on interest payments. The RBNZ said there are few indicators of household stress so far.

Robert covers RBA and RBNZ policy and the economy for MNI in Australia.
Robert covers RBA and RBNZ policy and the economy for MNI in Australia.

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