Liam Patten paid just over $1 million when he bought his three-bedroom home in Pakuranga in July 2020, pegging his mortgage at a two-year rate of 2.49 percent.
But when it comes time to settle her home loan on new terms next August, she figured that if interest rates are 6 percent or higher, she’ll have to find at least $500 more a week in payments.
“That’s a massive increase,” Liam said.
“In a minimum wage job, you don’t get more than $700 a week, so that’s almost all of someone’s paycheck.”
And Liam isn’t alone, with many other homeowners potentially facing such high raises.
Bruce Patten, a mortgage broker at Loan Market and Liam’s father, said the latest predictions are that rates from major banks could rise to 6.5 percent or even knock on the door of 7 percent.
That could equate to the typical Auckland homeowner paying $26,000 more per year or $500 per week.
That was based on Loan Market customers’ average Auckland home loan size of $650,000 and rates increased 4 per cent, from 2.5 per cent to 6.5 per cent, Patten said.
However, first-time homebuyers, who bought their homes in the last two years, could face jumps of nearly twice that.
If they had borrowed about $1 million worth, a 4 percent raise could equate to an extra $40,000 a year or $770 a week, Patten said.
Economists are issuing similar warnings.
They said “ugly” new inflation data was released on Tuesday that made it inevitable that the Reserve Bank would have to raise rates more aggressively, commentator Liam Dann reported.
The latest consumer price index inflation for the year to September was 7.2 percent, well above expectations of around 6.5 percent.
Rising construction costs, rental prices, and local government rates were some of the main drivers of rising prices in the last quarter.
Some economists now see the official cash rate peaking at 5.25 percent, from the current level of 3.5 percent.
“There’s no question now that OCR will go even higher,” said Infometrics economist Brad Olsen.
For Liam Patten, the rate hikes will be “massive” but also “manageable” because he has options on how to deal with them.
He has already built an extra bedroom and living room in the garage of his three-bedroom home in Pakuranga, effectively turning it into a four-bedroom property.
That allows her to live in the garage and rent out the rest of the house and earn additional income to pay the mortgage.
However, with the prospect of more than a $500 increase in payments in the future, he is now considering putting a small house in the back and living in it so he can rent his own room.
Or even potentially move back home to your parents and rent your own room.
As an apprentice, he also hopes to be a qualified electrician next year and earn a higher salary.
However, while young New Zealanders had more options to handle higher payments, it is more difficult for older homebuyers, Bruce Patten said.
His mortgage team had a 56-year-old client who recently separated from his wife and is in the process of purchasing another property.
However, due to his age, the bank was only willing to lend him on a shorter mortgage loan period, not the 30-year terms that younger buyers have access to.
“At 56, he’s already past the peak of his earning potential,” Patten said.
Harcourts St Heliers real estate owner David Findlay said another group of people finding rising rates more difficult are some investors buying new builds.
He said that these buyers had bought with the idea of obtaining capital gains and then selling.
But now that the houses are ready to be delivered a year and a half to two years after the buyers have signed up to buy them, the interest rates had risen so much that the purchases were no longer viable and they were asking the Findlay to sell the houses immediately.
However, Findlay said he has yet to see a rebound in mortgage sales.
Kelvin Davidson of analysts CoreLogic said there were 28 mortgage sales in the three months from May to July this year.
That’s still far less than the 768 mortgage sales during the same period in 2009 when the market was hit by the global financial crisis.
Tom Hartmann of Sorted, the government’s financial education site, advised those struggling to pay off their home loans to seek help planning their budgets.
They should also immediately tell their bank or lender that they’re having a hard time rather than trying to “suck it up,” he said.
Bruce Patten said those in trouble could also look to extend the term of their home loan so that weekly payments are reduced.
Another option is to split your home loan into terms of different lengths, such as 1-year and 3-year terms.
That way, homeowners aren’t forced to work out their entire mortgage at times when interest rates are highest, he said.