Interest rates are set to rise...how will you cope?
Poll: All good things must come to an end.
And so, after enjoying the lowest mortgage rates in 50 years, it's time to wave goodbye.
The Official Cash Rate (OCR), which heavily influences most interest rates, has not budged for three years.
But it's finally expected to start rising, possibly as early as next week - which means those who bought houses during the good times could be in for a rude awakening.
Westpac chief economist Dominick Stephens says some people may have been operating under the mistaken impression that low interest rates would last forever:
"We may find that some highly-leveraged borrowers are surprised and put in a difficult position by the substantial series of interest rate hikes that we think is coming."
In two years' time, Westpac forecasts the OCR will be 3 percentage points higher than it is now, more than doubling from the current 2.5 per cent low.
This year alone, Stephens expects the Reserve Bank will hike rates five times, taking the OCR to 3.75 per cent.
That means the closely-tied floating mortgage rate, which has been gathering dust for years, could close out the year around 7 per cent.
Small changes to interest rates can have big impacts on repayments - especially for new homeowners with oversized mortgages.
More than 60,000 New Zealand households who own or part-own their homes are already stretched, spending 40 per cent or more of their total income on housing.
By the end of the year, someone with a hefty half-million dollar debt may need to scrape together an extra $400 or so each month.
To calculate what your own increase could be, check out the accompanying "Mortgage Pain" table.
Strong competition means not all of the OCR hikes will necessarily be passed straight on to borrowers, says Stephens.
"I expect bank margins to gradually shrink over the next three years."
But it will still bring mortgage rates much closer to the long-term average of roughly 8 per cent.
For those who experienced mortgage rates higher than 20 per cent back in the 1980s, that is hardly a shock.
But it is something many new, inexperienced buyers may not have thought about.
The big question is whether the banks have done enough to protect borrowers from getting in over their heads.
Banks use "stress tests" to work out whether customers will still be able to service debt if interest rates rise.
But Massey University banking expert David Tripe says he is not 100 per cent confident their systems are as solid as they ought to be.
"I have a worry that in the excitement to get sales, some risk management considerations sometimes get overlooked."
Part of the problem is that each bank's lending criteria is a closely guarded commercial secret, so it is impossible to know just how cautious they have been.
We do know that in recent years, some lenders have gone gangbusters in giving loans to home buyers with small deposits.
"Certainly there was some argument that some of the lending done at high LVRs [loan-to-value ratios] was relatively risky," Tripe says.
That's compounded by the fact that some will have borrowed on the assumption that house prices will keep on rising.
Westpac expects the property market to lose some steam this year, with prices stagnating or even declining by the end of 2016.
That could leave those homeowners who have borrowed to the hilt technically underwater.
If they lost an income or needed to sell urgently, it is possible they could end up owing the bank.
Currently, mortgagee sales forced by a bank or other lender are few and far between.
PropertyIQ research director Jonno Ingerson says they make up about 1 per cent of all market sales, and have trended downwards since 2009.
Even during the worst depths of the recession, they barely topped 3000 a year - a small fraction of the 1.4 million home loans in the market.
The trend to watch will be whether those numbers begin to accelerate again over the next few years.
Stephens thinks foreclosures will continue to be a rarity.
"I'd imagine there'd be people whose budgets are really squeezed, and there may even be people who need to rearrange their housing situation," he says.
But that is likely to be a voluntary downgrade rather than a forced sale- and even then it is a "worst-case scenario".
The "stonking increase" in house prices in most parts of the country will have given many people a reasonable buffer should they need to sell, Stephens says.
Tripe says a steady rise in interest rates, rather than a sudden spike, will help ease the pressure too.
"People's debt servicing costs are not increasing very quickly."
Then there's the fact that the rises have been well signalled by economists and the Reserve Bank for at least six months.
"The prospect of rising mortgage rate shouldn't come out of the blue for anyone," says New Zealand Bankers' Association chief executive Kirk Hope.
Banks would much rather work with their customers than force mortgagee sales, he says.
"It's important for customers to talk to their bank if they feel like they might be coming under pressure."
Hope also points out that rate hikes are not all bad news.
They are being driven by the inflationary pressures of a stronger economy, which in theory should translate to higher wages.
"To a certain extent there is a level of compensation going on here," Hope says.
Savers also stand to win - and with a collective $123 billion of deposits in the bank, that's not exactly chickenfeed.
Term deposit rates will move up in tandem with mortgage rates, says Westpac's Dominick Stephens.
It's good news for pensioners in particular, who often rely on income from fixed-interest investments.
"If you go down to a bowling club, you'll tend to find people cheering," Stephens says.
PREPARE FOR HIGHER RATES
Put some money aside now for future repayment increases Talk to your bank before you get into financial trouble Ask for a discount on advertised mortgage rates, which could compensate for at least one OCR hike.
- © Fairfax NZ News