The Secret Interest Rates That Will Keep Homeowners From Selling
A series of interest rates, which banks keep secret, may be what ensures that homeowners don’t have to sell as home loans get more expensive.
Rates, sometimes referred to as stress test rates, are used by banks when you first apply to determine if you can pay off your loan.
But they are not applied at the rate you might see on a sign in the bank window. Sometimes they are double. They are designed so that increases in mortgage rates, as we are starting to see now, do not leave large numbers of people unable to pay their mortgages.
Brokers say current stress test rates range from 3.49% to 5.8% and 6.5%, although they have started to increase slightly in recent weeks, following the announced rates.
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But while the 3.49% rate may seem like an easy target for claims, brokers said banks using lower rates usually also use a higher expense calculation and require borrowers to put in more money. money aside for bills than others. This meant that it could be just as difficult to strike a deal.
The bank assumed that some of these expenses would be reduced if repayments increased, allowing the borrower to continue repaying the loan.
All of this means that while you may be hesitant about your mortgage payments becoming more expensive, the bank has already verified that you can handle it – either with the margin that’s already in your budget or with the cuts. that you can do within your budget. expenses.
Broker Glen McLeod said many homeowners chose to keep their repayments the same when interest rates fell, meaning they got their mortgages advanced and didn’t have to deal with increased repayments now.
Some he dealt with were still making higher refunds than they would have if they repaired, he said.
It was natural to worry about rising interest rates, he said. “But they don’t realize that they’ve already been stress tested at a much higher level.”
Banks have taken responsible lending rules seriously, he said. “Going back years and years, they wouldn’t have asked that the claims include expenses like insurance, but some are now forcing us to include them and do the stress test with those at the top. They have taken a conservative approach in the way they perform their calculations.
How much could interest rates increase?
Many economists and analysts are now predicting that the official exchange rate will rise to 1% by February and reach 1.5-2% next year.
According to data from the Reserve Bank, the last time the official exchange rate was 1.5%, in May and June 2019, the new one-year average rate was 4.6%, down from 3.7% last month.
A loan of $ 600,000 with an interest rate of 4.6% would cost $ 1,554 per fortnight over 25 years, compared to $ 1,416 at 3.7%.
Corelogic estimated that a buyer with a 30-year mortgage of $ 800,000 whose interest rate fell from 2.59% to 6% (which he noted was not listed in the current forecast) should find an additional $ 1,597 in payments per month.
“Even a new borrower with a ‘lesser’ mortgage, say $ 500,000, will have to find an additional $ 246 to $ 388 per month ($ 2,952 to $ 4,656 per year) in repayments if rates rise to 3.5%. or 4%.
McLeod chose a maximum of 5 percent. A mortgage “war” in Britain has led banks to offer five-year loans at less than 1% interest.
John Bolton, founder of mortgage brokerage firm Squirrel, expects interest rate hikes to rage soon.
He said it was common to see rates go up when people started to worry. The demand for corrective measures exceeded the rate at which the banks were able to obtain financing.
“That’s what we normally see – initially you see the rates going up very quickly as all the borrowers rush to fix it, because there just isn’t investor demand for it.”
He said that with around 80% of the country’s home loans at fixed rates, and most of it short-term, that meant there was a “massive amount” of fixed rates coming due.
“So you can imagine all these people have one-year fixed rates panicking about the rates trying to set them for three years, the rates go up real fast. My message to borrowers is simply not to panic about it. The massive rate hike will set in.
“The surge in wholesale interest rates is in large part due to the massive number of consumers rushing to fix it. It will work out. It’s just that immediate panic, “I have to fix it for as long as I can because the rates are going up.” People will settle in, the panic subsides and rates will normalize. “