While New Zealand’s interest rate is as low as it’s ever been, many home buyers have been tempted into spending more. But, as Finance Minister Steven Joyce warns, it’s vital that buyers think ahead when buying property, and take into consideration whether their mortgage debt will still be affordable in three or four years’ time if rates were to rise. Read on to find out more.
Be cautious and don’t get too comfortable
Home buyers have been warned to think ahead to the mortgage they could face in years to come should interest rates change, rather than simply focusing on the mortgage they’re facing today.
Finance Minister Steven Joyce said "The bigger risk that people should just think about is the potential for interest rates to now rise in the years ahead - we're seeing that now in bond rates and that's why I think it's important people don't overextend themselves at this point."
As the house price market looks to be peaking, Mr. Joyce urged buyers be cautious, saying in his view there is “not much upside” in house prices. Economists expect the Reserve Bank to start raising the OCR (Official Cash Rate) during 2018, but banks relying on offshore funding could increase rates before then as funding becomes more expensive.
A cooling property market in Auckland and the biggest ever building boom around the country could be signs of a shrinking gap between supply and demand in New Zealand’s housing market.
Debt to income lending
In November last year, Reserve Bank Governor Graeme Wheeler, announced a debt to income ratio restriction that could be used "if housing market imbalances were to deteriorate further".
While Mr. Joyce noted Mr. Wheeler’s concerns about the levels of debt in some households, he was cautious about adding further macro-prudential tools.
Before agreeing to add a debt to income ratio (DTI) to the Reserve Bank’s macro-prudential “tool kit”, Mr. Joyce said he wanted to understand the likely impact DTIs would have on first home buyers, demanding the Reserve Bank undertake a full cost benefit analysis before any decision is made.
A debt to income ratio is designed to regulate the amount of debt that a mortgage borrower can access relative to their incomes. The Reserve Bank will begin its analysis in March and Mr. Joyce indicated the report could be back by the middle of the year.
Do you have the best mortgage?
Choosing a mortgage is a major financial decision so it pays to get sound financial advice from a professional. Talk to a Mortgage Express adviser about a financial health check of your situation. With access to a number of home loan options, our advisers are well placed to find you the best mortgage.
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