More than half of new mortgages are issued with terms of 30 years
Home loans with 30-year terms are now the most common, with 57% of new mortgages taken out this year going to this longer-term option, according to data from credit bureau Centrix.
The proportion of home loans taken out with a 30-year term has risen steadily since 2017 with rising property prices, and experts have warned that their growing prevalence is reducing borrowers’ ability to cope if the mortgage stress was increasing.
The proportion of borrowers taking 30-year mortgages was highest in major centers – accounting for 66% of new mortgages in Auckland this year and 55% in Wellington.
Thirty-year terms were also more common for first-time home buyers, accounting for 74% of new mortgages to the group over the past three years – a figure that jumped to 83% this year.
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Mint Asset Management senior analyst Michael Kenealy said he was not surprised by the popularity of longer-term maturities.
“People are stretching their budget as far as they can and digging into their pockets as deep as they can to buy,” he said.
In the past, if borrowers had trouble keeping up with repayments, they could extend the term of their loan, but that option was being eroded for some, Kenealy said.
Extending a mortgage meant borrowers took longer to pay off debt and ultimately paid more interest, but it also reduced up-front repayments.
Mortgage stress is expected to increase with interest rates, and Kenealy said that in the worst-case scenario, some banks may impose interest-only repayments on borrowers for a period, or even reintroduce targeted mortgage repayment holidays, such as they did so at the start of the pandemic.
He warned that if banks started allowing too much interest or debt forgiveness, it could create moral hazard, meaning borrowers could become more willing to take unreasonable risks because they felt protected. consequences.
Centrix Analytics managing director Stuart Baxter said there were instances of home loans having terms longer than 30 years, but they were rare.
“It’s no surprise to see longer-term mortgages increasing over the past year as rising house prices and recent rate hikes have reduced cash flow for borrowers,” he said. said Baxter.
“Borrowers are being pushed into longer-term mortgages to keep payments as low as possible so they can stick to their short-term budget.”
Despite the trend, Baxter said owners are unlikely to see the rise in terms of 35 or even 40 years.
“Given the average age of a typical first-time buyer is in their 30s, a 40-year term would take them well into their 60s, which I think most banks would want to avoid,” he said. .
Baxter said mortgage arrears and financial distress remained at historic lows.
“Responsible lending rules are designed to protect the most vulnerable borrower, but with the prospect of further rate hikes and rising costs of living in the months ahead, I think we will see more borrowers who will find themselves under mortgage pressure,” he said.
A recent 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 rise to nearly 50%, and investors and some owner-occupiers would also be under pressure.
Some banks’ rates are already approaching these amounts, including Kiwibank, which has set the floating rate at 5%, the 1-year fixed rate at 4.55% and the 3-year rate at 5.39%.
CoreLogic senior economist Kelvin Davidson agreed that the increased prevalence of longer-term mortgages has cut out a traditional method used by struggling borrowers to cope.
He said the most vulnerable groups were new entrants to the market, who had bought at the highs in November and December and entered with just a 10% down payment.
Davidson said the Reserve Bank would likely continue to raise interest rates with inflation at its highest level in 30 years.
“The housing market is going to be a bit of collateral damage because they just have to get general inflation under control,” he said.
He said while mortgage stress increased as interest rates rose, unemployment remained low, which meant many homeowners were unlikely to be forced to sell, making any sort of downturn unlikely. falling prices.
“Really a lot depends on the labor market, that’s where the stress could come from if we see job losses,” he said.
Davidson said there was a feeling in the industry that distress sales and mortgagee sales were undesirable for lenders and borrowers, and banks would work with struggling homeowners.
The Reserve Bank does not collect data on the proportion of home loans issued at different tenors, which Davidson said could be a blind spot for the central bank.