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Low rates 'hiding mortgage stress'

Home loan borrowers may start to fall behind on their mortgages when interest rates start to rise, a banking expert warns.

Thursday, February 28th 2013, 6:00AM

by Niko Kloeten

KPMG partner John Kensington, editor of the accounting firm’s Financial Institutions Performance Survey (FIPS), said that despite falling over the past couple of years, impaired and past due assets were still well above pre-global financial crisis levels.

But he said low interest rates meant banks were managing to prevent these troubles spilling over into a flood of mortgagee sales, which currently account for only 0.2% of houses being sold.

Kensington said banks were managing their struggling assets well and low rates allowed them more flexibility when dealing with clients.

“What some banks are doing at the moment is that if someone can’t make all their payment, provided they can pay the interest component, they’re prepared to let them make part payment on the principal.”

But when interest rates started to rise, these sorts of arrangements would be put under pressure, he said.

“If you make people pay interest at 8% there are going to be even more people past due. If the rates go higher payment will be higher and there will be a larger interest rate component.”

Kensington said the issue of low interest rates went beyond those who were behind on their mortgage payments.

“Banks are writing lots of loans at 4.9% with 100% loan-to-value ratio; what will happen when the OCR and inflation pushes borrowing costs up to 7-8%? That’s one of the questions being asked.”

Comments from our readers

On 28 February 2013 at 9:22 am Darcy said:
100% lending at 4.90% eh - keen to get some of that?
On 28 February 2013 at 9:51 am Dean Wright Mortgage Broker said:
This is incorrect no bank is lending at 100% funding 95% is the maximum . All the banks use a higher interest rate calculation to work out servicing to cover clients in the event of higher rates
On 28 February 2013 at 12:38 pm Paul Maher said:
100% @ 4.9% - please advise which lenders are doing that ?
On 28 February 2013 at 12:48 pm satish said:
The author seems to have some facts incorrect.No lender is lending @ 100% LVR - not for first-home buyers certainly. If any lender is, it must be an exception.Most lenders are using a default interest rate of 6% to ensure the application passes servicing at that level of interest. This could be a bit higher at 7%. If an application meets servicing at 7%,the borrower/s have shown an ability to service the loan at that rate ( which could be a couple of years away at least given current trends). In the longer term,both lenders and borrowers have to be prudent and should factor in increased repayment levels to cope with the possible stress when interest rates do step up.
On 28 February 2013 at 1:28 pm Niko Kloeten said:
Just to clarify John's comments, he said these 100% loans at 4.9% are being made "only to select clients with either considerable equity in other property or a proven history with the bank." So not every person off the street is getting them.
On 28 February 2013 at 2:51 pm Satish Kamath said:
@Niko...clarification accepted. This practice of lending 100% on another property has been prevalent in NZ for a long time now and is not something new to the market.The lender will use the equity held in another property to leverage 100% lending against another property.Only condition being both ( or more than 2 properties in many scenarios)securities/properties will be taken over as collateral by the lender.
On 28 February 2013 at 3:07 pm Dirty Harry said:
In other words there is no such thing as 100%, let alone at 4.9 But that's not what the reader gets from reading "“Banks are writing lots of loans at 4.9% with 100% loan-to-value ratio;" Those "select customers" will have strong equity across other assets and be a significant client to bargain that low. Their total LVR will probably be better than 75% over half a dozen or more rentals with strong cashflows to boot. In 2009 mortgage stress and rising mortgagee sales had a lot more to do with unemployment figures and rising food and energy costs than rates, and next time round it will be the same. In two years time rising interest costs will only be a part of the picture.
On 28 February 2013 at 3:54 pm Amused said:
Niko – The Banks routinely allow customers to borrow 100% of the purchase price paid for a new property “when” another property with good equity is also offered as security. These are NOT 100% loans sorry. The true 100% loan by definition is where the borrower has NO equity/deposit to contribute whatsoever towards a purchase. As others have already commented above NONE of the banks are writing these types of loans at present to anyone. With respect I think John Kensington needs a banker/mortgage broker to educate him what 100% lending actually is as his comments above are misleading to prospective borrowers and your readers.
On 28 February 2013 at 6:32 pm w k said:
@niko, with due respect to the people you spoke with, if you want more accurate information of what's happening in the market place, talk to the people who are running in the market place, ie. doing the actual work/trade/business, etc, doesn't matter if he's only a salesman. Not the people at the top with loads of qualifications/titles after their names, only look at numbers and sit in the office.
On 1 March 2013 at 2:49 pm Giles Thorman said:
I must admit to being staggered at the reaction to this article. 90% of the article discusses the potential for more problems with mortgagee sales etc in the future as interest rates rise. It seems that all the commentators here chose to ignore that and instead became fixated with a quoted mortgage rate and LVR. Just above the article is a link to an article that starts: "New Zealand is still at significant risk of a sharp correction in property prices, according to Standard and Poors." No doubt as they have "loads of qualifications/titles after their names, only look at numbers and sit in the office", they will not be worth listening to either!
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Westpac predicting rates to rise faster than forecast

In its recently released quarterly economic overview report, Stephens writes that Westpac’s prediction is for 90-day interest rates to rise much faster than either the Reserve Bank or the market expects.

It picks the first move in interest rates to happen in June 2013, when it says the OCR will still be at 2.50%.

By 2014, Westpac expects 90-day rates to be 4%. By comparison, the RBNZ tips them to have barely moved at 2.75% and the swaps market implied pricing puts them even lower, at just over 2.50%.
By 2015, Westpac expects rates to be over 5%.

Stephens’ report said that the Christchurch rebuild would make it hard for New Zealand to avoid substantial inflation.

“The inflation figures suggest that central co-ordination of small to moderate repairs – the bulk of the activity to date – has been effective in limiting construction cost inflation. This is unlikely to remain the case as major repairs and rebuilds take over as the main form of activity.”

He pointed to the fact that new housing in the Canterbury region has already risen roughly 10% over the past year.

Stephens said he expected home loan rates to follow the same trajectory as 90-day rates. They might stay on hold for another year or so but then would have to rise.

“Floating rates may not rise quite as rapidly as 90-day rates because at the moment banks have to pay a higher margin to procure funds from overseas. That pressure might come off.”
But he said it was unrealistic to expect the current historic lows to continue past 2013.

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Disclaimer: Every possible effort has been made to keep the information in the rates tables as accurate as possible, however, neither the publishers of Mortgage Rates nor anyone engaged to compile these tables accept any liability for inaccuracies or any loss suffered as a result. It is strongly advised that readers check loan details directly with the provider concerned.

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