BNZ and Kiwibank raise mortgage rates: ‘It can be discouraging to see mortgage rates rising’, economist says

Rising mortgage rates put pressure on household purchasing power, which the Reserve Bank needs to control inflation.

ROB STOCK / Stuff

Rising mortgage rates put pressure on household purchasing power, which the Reserve Bank needs to control inflation.

Kiwibank and the Bank of New Zealand have raised some of their main interest rates on home loans.

BNZ raised its one-year mortgage rates for homeowners from 5.15% to 5.45% and its two-year rate from 5.39% to 5.59%.

These rates are for borrowers whose equity in their home is 20% or more.

BNZ charges additional ‘low equity premiums’ for people with less than 20% equity in their home, although like all banks this is only calculated when the loan is first taken out.

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Banks have pledged not to add low equity premiums to loans for people who once had 20% or more equity but have seen their home’s value drop significantly.

The BNZ did not modify its floating rates of mortgages, nor the rates of its personal loans, nor its overdrafts.

Kiwibank raised its one-year fixed rate home loans for people with 20% or more equity in their home to 5.39% from 4.95%.

ROBERT KITCHIN/STUFF

Reserve Bank Governor Adrian Orr speaks with Stuff a day after raising the official exchange rate. (Video first published on August 18, 2022)

It also raised its two-, three- and four-year fixed mortgage rates, but left its five-year fixed rate unchanged at 5.99%.

As with BNZ, people with less than 20% equity in their home pay more.

Its new one-year rate for low-deposit borrowers has risen from 5.95%​ to 6.39%​.

Kerr said, “As we can see in the current cycle, interest rate movement can be quite volatile. When economic growth slows, interest rates are reduced to stimulate growth. We have seen a historic low in interest rates during the Covid-19 pandemic.

“When the economy heats up, interest rates are raised to cool the economy and tame the inflationary beast.

Kiwibank Chief Economist Jarrod Kerr says, “It can be daunting to see mortgage rates go up, but interest rates always move with the economic cycle.

Provided/Provided

Kiwibank Chief Economist Jarrod Kerr says, “It can be daunting to see mortgage rates go up, but interest rates always move with the economic cycle.

“Interest rates have been raised aggressively by the Reserve Bank of New Zealand, which in turn is pushing banks to raise interest rates, in response to rapid price increases.”

Borrowers could face further hikes, he said.

“Many people have asked ‘will home loan interest rates continue to rise’, and the answer is that the Reserve Bank will continue to raise interest rates until they see a clear evolution of inflation,” he said.

“I know interest rate volatility in recent years has been dramatic, but we expect interest rates to peak over the next year as the economy cools and inflation declines.”

Kiwibank estimated that inflation had peaked at 7.3% and was expected to fall back into the Reserve Bank’s target range of 1% to 3% in 2023.

“Mortgage rates are expected to peak at or slightly above current levels. Mortgage rates should stay around current levels until next year,” he said.

Many households have already experienced large swings in home loan rates.

“Mortgage rates can fluctuate a lot. When the global financial crisis hit in 2008, mortgage rates peaked at over 10%,” he said.

Some economists now believe that the official exchange rate will need to peak higher than previously expected to manage inflation. ANZ expects 4.75% and Infometrics said on Thursday it expects a peak of 4.5%.

“We are increasingly of the view that the risks of persistently higher inflation are on the upside and, due to this risk, the OCR may need to rise further.”

Infometrics previously forecast a 3.5% spike.

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