Interest rate hikes will bite as home loans are repriced over the next year. Many homeowners will refix at a substantially higher rate.

Around 60% of home loans will pay a higher interest rate over the next year or so, according to property research firm CoreLogic.

“Currently around 50% of existing loans (by value) are fixed but due to be repriced within the next 12 months, and another 10% are floating. In other words, about 60% of loans are likely to see a further rise in interest rates over the next year or so,” Kelvin Davidson, CoreLogic NZ Chief Property Economist, said earlier this year.

That’s going to hurt – especially borrowers refixing from historically low-interest rates to substantially higher ones.

“We don’t know precisely when all of these borrowers originally took out their loans, and therefore the starting interest rates they are changing from. However, if we make the reasonable assumption that a lot of borrowers have simply been on a series of rolling one-year fixes, the change that many will be seeing as they reprice is still in the vicinity of 2-3% for most of 2023,” Davidson said.

“As an example, for somebody repricing from 4% a year ago to 6.5% now, the increase in mortgage repayments on a $500,000, 30-year mortgage, would be around $9,275 per year,” he said.

Households are showing resilience

Despite interest repayments biting into budgets, households appear to be showing resilience, with low unemployment working in borrowers’ favour. However, forecasters have predicted an uptick in unemployment, mainly because job creation isn’t keeping pace with people entering the workforce.

“The repricing process seen to date has been fairly smooth,” Davidson said. “So far, loan repayment problems and non-performing debt on the banks’ books remain very low, even though many borrowers have already moved from the ultra-low 2-2.5% rates onto a higher level. However, we should still be mindful of recent Centrix data reporting a lift in borrowers missing repayments.”

Davidson suggested resilient employment is a helpful buffer for the potential impact of mortgage repricing, And as time goes by, repricing events will go from “high to high” in terms of mortgage rates, rather than the “low to high,” further reducing the shock value of refixing.

Refix, restructure, refinance

Most borrowers simply refix their mortgage once the current term expires, taking the new (higher) interest on the chin.

On other occasions borrowers will restructure a mortgage, changing the way it is repaid with the current lender. For example, splitting a loan over different fixed interest rates is a popular ploy to hedge against changing interest rates.

Refinancing involves arranging a completely new mortgage, using it to repay the old mortgage, perhaps to take advantage of a lower interest rate or secure a longer term. The process incurs significant costs, including break fees (if your mortgage is still on a fixed interest rate), incentive clawback (if you accepted an incentive at the time of securing your mortgage), legal fees, valuation fees, and mortgage discharge and establishment fees.

When costs keep rising, stay close to your accountant. Call 0800 GOODWINS for our perspective on market movements and the latest listings.