Rise in million-dollar mortgages prompts debt warning

The number of Kiwis who owe more than a million dollars on their home has more than doubled in the past four years, prompting a warning to borrowers to prepare for higher debt servicing costs.

More than 76,000 borrowers have a mortgage of $1m or more, up from 35,568 in 2017, says credit bureau Centrix.

And 9800 of them owe $2m-plus – up from 4409 just four years ago.

Centrix managing director Keith McLaughlin said the jump was a consequence of rising property prices and low interest rates.

“People don’t want to miss out on buying the property. They don’t want to miss the boat, therefore they are prepared to mortgage themselves up.

“The interest rates are very low and quite accessible so [people think] why put money in the bank, why put it into other investments, property is rising, interest rates are low – it is a natural thought process. You can understand how people have got to where they have.”

Of those with a million-plus mortgage, 59 per cent are Auckland-based borrowers and two-thirds (66 per cent) of those loans are held by people under the age of 50.

Of those with a $2m-plus mortgage, 69 per cent were in Auckland but there was a skew towards older borrowers, with 76 per cent held by people aged 40 or over.

McLaughlin said the higher-value mortgages held by older people were probably driven by families trading up their homes, or by relationship splits, where people who own a high-value property have had to sell and then start again.

“I think there is an element of that in there and of course it is exacerbated by the price of the houses.”

He said the data would also include those who have borrowed against their main home to buy a holiday place.

McLaughlin said that while having a large mortgage wasn’t a bad thing if borrowers could meet the repayments, small changes in interest rates could have a big impact on household incomes.

“A 1 per cent increase in interest rates for a household with a $1m mortgage would see repayments increase by nearly $200 per week. For those with a $2m mortgage, this increase would almost be $400.”

He saidthere was a growing consensus that interest rates would start rising before the end of the year to counter growing inflationary pressure.

“While we don’t know the scale of future interest rate increases, we can expect any rise to place pressure on those households who have not factored increased repayments into their budgets.”

He urged homeowners to start preparing now for higher rates, to avoid a nasty shock.

“Start by developing a range of budgets that factor in different interest rates, and make sure that you have a plan in place if rates rise so that you can continue to make repayments,” he said.

“If you are concerned, talk to your bank or a budget adviser so that you can work together to develop a solution. It is always best to have open and honest conversations early than find yourself in a position where you miss payments.”

He also warned of possible job losses, particularly for those in regions where another high-paying job may not be easy to find.

“You look at what is happening at Marsden Point – all of a sudden you have got a number of people being made unemployed – across the country you might say 4 per cent [unemployment] is not a problem, but when you look at some of the specific regions … you can get disparity.”

McLaughlin said selling an expensive house in order to downsize for a smaller mortgage may not be easy in a property market where there was very tight supply.

And one thing that many people did not want to think about right now was the risk of another long lockdown.

“Last time, we got onto this deferral scheme where mortgages were deferred but it does have an impact on the economy, it does have an impact on people’s earning ability – do you bring out wage subsidies again – all those things that create uncertainty in the market.”

Josh Farry, a financial adviser at The Money Men on Auckland’s North Shore, said so far only a handful of clients had come to him worried about rising interest rates. The major concern was more about changes to tax on investment properties.

He said while interest rate increases might appear to only cost a little bit more in the short term, the longer-term cost could be hefty.

Farry said a $1m loan at a 2.5 per cent interest rate cost $911 a week to service – a $421,000 interest cost over 30 years. If the interest rate rose to 3 per cent, the weekly repayment only goes to $972 but the difference in total interest was an extra $96,000.

“Which is huge,” he said

Farry said it looked as though rates are headed to around 3.5 per cent next year, and that would take payments up to $1036 a week or an extra $194,000 in interest over 30 years.

He said the shorter-term impact on cashflow – an extra $110 a week – was substantial, but probably not shocking if you had a million-dollar mortgage. “But it is the additional amount you will pay in interest.”

He said borrowers should consider fixing their terms for longer and splitting their mortgage into smaller chunks.

“That is one of the best things you can do because if you fix $1m for a year at the cheapest rate, in a year’s time it goes from 2.5 to 3.5 per cent and it’s a bigger impact on your cashflow. That is the worst thing you can do.”

He said insurance was also good to help protect against unforeseen events. “Having mortgage protection or income protection insurance for unforeseen circumstances.”

He said one of the big risks for people was a fall in income. “The economy is cranking at the moment. Nearly all of my clients I talk to can’t find enough staff.”

But he said if things slowed down, that would be a big risk for people who were highly leveraged. “We are a country of a high percentage of self-employed people.”

He said areas like property and construction were going strong at the moment, but at some point they would not be.

“It just comes back to not over-leveraging yourself and being aware of those changes and spreading your lending out over time.”

Farry said having rainy-day savings was also key. “If Covid has taught anyone anything, it’s that it is worthwhile having savings in case something pretty outrageous happens.”

He said people on commission, or who were doing more business than normal, should be careful. “If that slowed down, are you still going to maintain the same level of income to be able to service your mortgage?”

Farry said borrowers should also avoid racking up short-term debt: credit cards; car loans; and buy, now pay later.

“The one thing you always need to pay is your mortgage. You don’t want to get yourself into strife because you have picked up a $30k car loan.”

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