Higher interest rates impact cuts both ways

Last updated 15:03 14/12/2013

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The Reserve Bank is poised to lift the official cash rate - pushing up interest rates. Rebecca Stevenson reports.

Nothing. On the past 21 occasions the Reserve Bank has considered the official cash rate, it has decided to do nothing.

The official cash rate, or OCR, influences the interest rates retail banks offer to you and me.

Generally, the Reserve Bank says, market interest rates are held around the OCR level which has been 2.5 per cent since March 2011. This means for the past three years Kiwis have enjoyed cheap debt. But nothing lasts forever. Many of the big retail banks are now tipping an OCR increase next year, ANZ as early as January and ASB in March.

So what will a rise in the OCR and retail bank interest rates mean for Kiwis? It depends if you are a borrower, or a lender.

THE BORROWERS

Kiwis love to borrow. Most of all, we love to borrow to buy houses. The Reserve Bank's November Financial Stability Report spells it out - New Zealand's household indebtedness is high.

Our household debt-to-disposable income ratio is 146 per cent, not far off the 2009 peak of 153 per cent - this means that for every $1 we earn, we owe almost $1.50.

In addition, growth in housing-related debt has outpaced income growth and the bank warns borrowers may have difficulty servicing their obligations as interest rates begin to rise.

More than 30 per cent of households are paying a mortgage, Statistics New Zealand's Household Economic Survey for 2013 found.

Reserve Bank statistics show we owe $186 billion for housing loans and on average Kiwis spend $356 per week on their mortgage, the Household Economic Survey reported.

But 61,000 Kiwi households - or more than 5 per cent - who own or partly own the home they live in, spend 40 per cent or more of their total income on housing, Statistics New Zealand says. These borrowers with "stretched debt positions" will feel the most hurt from higher interest rates, the Reserve Bank says.

Alexis Langdale and her partner purchased their first home about a month ago - lucky to get into the market before the rules on home loan deposits changed, she says. They bought a three- bedroom, one-bathroom property in Mangere East for $490,000.

Langdale says the mortgage payment is about $1200 a fortnight and her eyes are firmly on interest rates. An increase of 1 per cent would see Langdale's mortgage payment increase by more than $100 a fortnight and add about $35,000 in interest to the loan over 15 years.

"We put a bit of money aside every week just so that we can have enough when rates rise . . . we are definitely concerned about it."

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Dannevirke resident Hannah Wallace owns a three-bedroom home, borrowing just over $110,000. She and her partner pulled money from their KiwiSaver accounts to get their first home. Wallace has a fixed rate for three years of 6.29 per cent with weekly payments of $160 so can breathe easy - for a while anyway.

"If in three years there is only a 1 per cent rise, we wouldn't really be bothered financially, but if in three years there is more than a 1 per cent rise, we would really have to consider hard budgeting." She says both she and her partner expect their wages to increase which helps them feel "a little bit more comfortable".

"Also being in a small town with house prices so cheap it was quite easy to get a smaller loan."

The Reserve Bank is flagging interest rates will be in the "vicinity" of 7 to 8 per cent in the next two to three years.

BNZ is currently offering a 5.99 per cent three-year fixed mortgage interest rate, as is Westpac, and both banks are offering about 5.75 per cent floating.

Commission for Financial Literacy and Retirement Income executive director David Kneebone says it's a good idea for mortgage holders to calculate the cost of their mortgage adding a rate increase of 1 or 2 per cent. You need to work out what the impact will be and how much you will have to pay - and if you can afford it, Kneebone says. The mortgage calculator on the commission's Sorted website makes this easy to do.

THE LENDERS

For every mortgage holder sweating on a rise in interest rates, there are those who have been feeling the pinch from poor returns from fixed interest investments.

Kiwis have $119 billion deposited with registered banks, Reserve Bank figures show. These Kiwis are in effect lending their savings to the bank which then lends to other via mortgages.

Just as mortgage rates are influenced by the OCR, so are term deposit rates. In this case low rates are a financial drag.

Our national saving rate is low by international standards and has been trending down over the past three decades, a research paper by Treasury principal adviser Anne-Marie Brook reported earlier this year.

This is our hyper housing market at play. Brook says high property prices tend to be associated with "lower-than- otherwise" private saving. It's not clear why, but Brook points to high house prices allowing more borrowing, and more borrowing reducing our disposable income and ability to save.

On average, Kiwi households earned just over $4000 from investments for the year ended June 2013, the Household Economic Survey reported, an increase from 2012 of about $500.

New Zealand Institute of Economic Research principal economist Shamubeel Eaqub says about one quarter of people have investment incomes and they tend to be older "when they can enjoy the fruits of their savings during their working life".

Fixed interest investments are low risk but the rates that have been on offer have been correspondingly low - from about 2 to 5 per cent depending on the length of the term you are locking in and the size of your investment.

For Napier retiree Trevor Wakely a rise in interest rates would be "wonderful". Wakely has a small fixed interest term deposit of about $2000 earning 4.5 per cent interest. This should earn him about $90 per year minus withholding tax. Even a rise of 1 per cent would help, Wakely says. An increase in rate to 5.5 per cent would see Wakely earning an extra $20 a year in interest, which could then be added to the amount invested.

If interest rates hit the top of the range the Reserve Bank suggested could be reached in the next few years, 8 per cent, Wakely would double the interest he was earning to $160 per year.

Invercargill superannuitant Dale (not his real name) brings in about $1400 per year after tax with a term deposit that's earning just over 4 per cent. The former teacher said an increase to 7 per cent would see the 83-year-old's return increase from $1400 to $2450 - meaning the nest egg for his grandchildren will grow much faster.

And then there's everybody else; neither borrowers nor lenders.

Inflation tends to rise with interest rates, so everything that we buy will probably get more expensive too next year when - or if - interest rates rise.

- © Fairfax NZ News

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