Responsible Lending? I wonder….

[Logen Ninefingers]

Interesting to see the following quote in the below article:
“Where was the bank's stress test when we took the mortgage out? Is this not irresponsible lending by the bank, akin to the United States sub-prime mortgage lending fiasco?”

The size of these mortgages is just staggering. IMO, lending someone $850,000 to buy residential property is an act of folly.

—————

https://i.stuff.co.nz/business/prope...sell-the-house

Mortgage rate pain: 'We will probably have to sell the house'
Miriam Bell
05:00, Jul 06 2023

‘Mortgage rates have skyrocketed over the last two years, and that change will cause pain for many people refixing this year.

After Covid hit in 2020, rates fell to record lows of around 2%, but two years on they have climbed to around 7%.

For households coming off low two year rate deals this year, and moving to current higher rates, that means their repayments will cost thousands more.

It will be a huge financial shock to many, so when Stuff reported on the "mortgage bomb" on Tuesday, we asked for reader experiences.

One reader said he and his partner bought their West Auckland home in April 2021 with a fixed rate of 2.65%. They have a $700,000 mortgage on a 20-year term, and were paying $3761 a month.

But they were due to refix, and the best fixed rate currently available was 7.25%, he said. It meant their repayments would leap to $5533 a month.

“That is an increase of $1772 per month, or an extra $21,264 per year. So we will need to find nearly an extra $30,000 worth of income in order to service the increased interest cost.”

They could not extend the term of their mortgage as he was in his early 50s, and the sole income earner for the family.
“So, we will probably have to sell the house as we can't afford this,” he said.

“Where was the bank's stress test when we took the mortgage out? Is this not irresponsible lending by the bank, akin to the United States sub-prime mortgage lending fiasco?”

Another Auckland reader bought a KiwiBuild house in 2019 for $650,000, and refixed their mortgage nearly two years ago for 2.79%.

That fixed-term rate would come to an end in September, and he expected the repayments on their $460,000 mortgage debt would jump significantly when they refixed again.

“What I want to know is why it is not possible to fix mortgages for longer periods of time in New Zealand,” he said
“In the United States, I believe borrowers can fix their mortgage for the life of the loan, why don’t we have that opportunity here?”

The existing situation seemed to favour the banks rather than the public, and hearing about their record profits was a savage burn on top of the rise in costs of living, which were making it harder to get by, he said.

One reader said she and her family had moved to Australia to get better paying jobs, so they could manage their mortgage repayments.

The family put their life savings into buying a house in 2021. They had an $850,000 mortgage, and were on a rate of 3.89%.

When they had to refix to 6.69%, they decided to rent their house out, and cross the ditch, she said.

“The rent is not sufficient to pay for the mortgage, and we have considered selling our house, but due to the drop in the market our house’s value has decreased by $200,000.”

They were struggling to pay rent, child care costs and manage living expenses in Australia, and were hoping for some sort of change, she said.

Another reader originally bought his Auckland house in 2012, but bought his ex-wife out when they separated in 2021.

At the time rent cost about as much as the mortgage, which he got on a 2.59% rate.

But he was about to experience the pain of a massive increase in rates, after he refixed for a special six-month rate of 6.84% this week, he said.

“This increases my mortgage by $811 a fortnight, and I find myself in a predicament. I've already cancelled all my subscriptions, the only other thing I can skimp on is insurance.”

His house’s value had decreased so much, there was no way he could sell, he said.

“I'm on a very well-paid job, roughly $140,000. I shouldn't be having to struggle like this. I get nothing from the government, but pay $40,000 in tax, and rates will hit me next.”

He was now signing up to do Uber driving on the weeks that he did not have his children, he said.

A reader with a $680,000 mortgage and 26 years left on the term was on a 2.5% rate until October, but said his family would find it very tough after they refixed.

“If we jump to say 7% then we'll be paying an extra $400 per week. Our weekly budget currently has nothing spare, before the rise.

“My partner and I are on reasonable incomes of about $150,000 pre-tax combined. But we have four kids, and with the cost of everything going up, we are barely holding on.”

They did not know how they were going to be able to come up with that much more money every week, he said.

“One option is to go interest-only, but given our age, extending our mortgage term for another year or two will mean we may be forced to work beyond 65.”

One Christchurch reader said her family had several mortgages under different scenarios, and would feel the increase in rates.

The family home was split into three mortgages, so only one third was coming up off 2.95% in November to whatever was the rate then, she said.

But the rate on a property they own and “rent” to her parents to make housing more affordable for them on the pension had gone from 2.35% to 6.39%.

“They pay half the mortgage, and we pay the other half. So not only is this a hit on our outgoings when trying to help family out, but also on their pension payments.

“We also have a rental which has gone from 2.49% to 6.35%. Even with a rent increase for a new tenant we now have a shortfall to cover.”

Add in childcare, and the increase in petrol, groceries, and so on, and it was not a great combination, she said.

“But there is no crystal ball, and we haven’t locked in for longer than two years. We do think rates will come back down. We just have to wear the pain for now and work out other ways to save costs.

“On my partner's first house the rate was closer to 8%, so for him it’s not as bad as it could be.”

Meanwhile, 3% of 1091 survey respondents thought they might have to sell a property in the next year because of higher interest rates, according to the new Horizon Research Banking Monitor.

That figure was equivalent to 43,000 people with a mortgage.

The research also found that 23% of, or 303,000, mortgage holders were very concerned they might not be able to afford their repayments if their mortgage was refixed at the current floating rate, or a higher fixed rate.’

[Aaron]

“Where was the bank's stress test when we took the mortgage out? Is this not irresponsible lending by the bank, akin to the United States sub-prime mortgage lending fiasco?”

The size of these mortgages is just staggering. IMO, lending someone $850,000 to buy residential property is an act of folly.

I think the banks were stress testing at around 8%. You will know if it was folly if the loans go bad. Bad for the people borrowing maybe, but the banks must be happy.

Shame a bunch of cry babies do not want to take responsibility for their actions and are blaming the banks for giving them the money. I imagine a couple of years ago when they wanted to jump on the house buying band wagon and were probably complaining that they weren't being given enough money by the banks.

Maybe if they tough it out for a few of years they will see the benefits of inflation and suppressed interest rates on their debt and house prices.

The RBNZ sets the price of capital (interest rates) and can create capital (printing money) out of thin air.

Adrian's Funding For Lending and near 0% interest rates were designed to prevent a 10% fall in house prices at the time of the pandemic. You have to admit they were pretty successful.

Maybe instead of the RBNZ guaranteeing house prices and cost of living increases (inflation) of 2-3%pa they should have a target of 0%. 0% inflation sounds like price stability to me.

Maybe the MPC should be sacked if inflation remains too high for too long as they have failed to do the job they were appointed for. If they are not capable of managing inflation perhaps appointing people with a spine and a set of cajones would be a better option. People pleasers don't help anyone in the long run.

[kiora]

Inflation is always and everywhere a monetary phenomenon.

~ Milton Friedman

[Jay]

The banks increased their Stress test rate as the rates were rising from memory.
If they had a stress test rate of say 8% when rates were 2-3% the same people would also be crying foul.
No body really knew when and how high rates could/would go.

[Logen Ninefingers]

The banks increased their Stress test rate as the rates were rising from memory.
If they had a stress test rate of say 8% when rates were 2-3% the same people would also be crying foul.
No body really knew when and how high rates could/would go.

So who stuffed up then in your opinion?

[Aaron]

So who stuffed up then in your opinion?

No one stuffed up. Other than maybe Adrian Orr and central bank monetary policy.

Can we agree the RBNZ low interest rates and easy money as well as excessive immigration were largely responsible for excessive speculation in housing. Kiwis borrowing more and more to buy houses off each other. It happened in Ireland in the GFC, seemed stupid then and might appear stupid now unless the RBNZ drops rates and pushes house prices up again in which case they are geniuses, it is a gamble on central bank policy either way.

People saw prices going up 10-20% a year so wanted to jump on the band wagon as people do in speculative mania. Sadly for the first home buyers they were not trying to make money but secure a future for themselves and their families as they saw home ownership being pushed beyond the reach of an average salary earner. They took a chance and it has not paid off YET.

They made their choices and took the risk that property might not increase every year at 10-20% and that interest rates might not remain at historically low rates forever.

People should stop whining and take responsibility for their actions. That said I have not taken my own advice and have been angry at Adrian for years because I did not load up with excessive amounts of debt and accept unreasonably low yields. Mostly because I thought the RBNZ would act responsibly. I was angry because I would have been a lot richer for doing so.

If anything the media should be looking at inflation targeting and find the study that proved it was a good idea in the first place, because I can't.

We should also question if printing money (capital) makes us richer or poorer and if suppressing the price of capital (interest rates) results in better decision making when allocating capital.

Do you reward investors or speculators??? Or perhaps provide stability so that people can make decisions without having to factor in inflation.

This is the Share Trader website so I suspect the answer is speculators.

[Jay]

No one stuffed up. Other than maybe Adrian Orr and central bank monetary policy.

Can we agree the RBNZ low interest rates and easy money as well as excessive immigration were largely responsible for excessive speculation in housing. Kiwis borrowing more and more to buy houses off each other. It happened in Ireland in the GFC, seemed stupid then and might appear stupid now unless the RBNZ drops rates and pushes house prices up again in which case they are geniuses, it is a gamble on central bank policy either way.

People saw prices going up 10-20% a year so wanted to jump on the band wagon as people do in speculative mania. Sadly for the first home buyers they were not trying to make money but secure a future for themselves and their families as they saw home ownership being pushed beyond the reach of an average salary earner. They took a chance and it has not paid off YET.

They made their choices and took the risk that property might not increase every year at 10-20% and that interest rates might not remain at historically low rates forever.

People should stop whining and take responsibility for their actions. That said I have not taken my own advice and have been angry at Adrian for years because I did not load up with excessive amounts of debt and accept unreasonably low yields. Mostly because I thought the RBNZ would act responsibly. I was angry because I would have been a lot richer for doing so.

If anything the media should be looking at inflation targeting and find the study that proved it was a good idea in the first place, because I can't.

We should also question if printing money (capital) makes us richer or poorer and if suppressing the price of capital (interest rates) results in better decision making when allocating capital.

Do you reward investors or speculators??? Or perhaps provide stability so that people can make decisions without having to factor in inflation.

This is the Share Trader website so I suspect the answer is speculators.

What he said!

[Logen Ninefingers]

Nobody stuffed up, but the results of the below survey make alarming reading.
But the bank stress tests were all in order, the amounts being loaned were all in order, and there was no ‘subprime’ lending of any sort going on. Honest.

If you put ‘bad credit and low deposit home loans new zealand’ into Google, you should see how many websites show up. I can only presume these entities exist because nobody is using them.

https://www.newstalkzb.co.nz/on-air/...nterest-rates/

Horizon Research data reveals 43,000 mortgage holders fear they'll have to sell their property

Publish Date Thu, 6 Jul 2023, 6:19PM

‘11 percent of mortgage holders responding to a survey have said they'll likely need to sell in the next 12 months.

That's according to an opt-in Horizon Research survey on the impact of higher interest rates.

About 70 percent are worried repayments could be unaffordable.’

[Logen Ninefingers]

No one stuffed up. Other than maybe Adrian Orr and central bank monetary policy.

Can we agree the RBNZ low interest rates and easy money as well as excessive immigration were largely responsible for excessive speculation in housing. Kiwis borrowing more and more to buy houses off each other. It happened in Ireland in the GFC, seemed stupid then and might appear stupid now unless the RBNZ drops rates and pushes house prices up again in which case they are geniuses, it is a gamble on central bank policy either way.

People saw prices going up 10-20% a year so wanted to jump on the band wagon as people do in speculative mania. Sadly for the first home buyers they were not trying to make money but secure a future for themselves and their families as they saw home ownership being pushed beyond the reach of an average salary earner. They took a chance and it has not paid off YET.

They made their choices and took the risk that property might not increase every year at 10-20% and that interest rates might not remain at historically low rates forever.

People should stop whining and take responsibility for their actions. That said I have not taken my own advice and have been angry at Adrian for years because I did not load up with excessive amounts of debt and accept unreasonably low yields. Mostly because I thought the RBNZ would act responsibly. I was angry because I would have been a lot richer for doing so.

If anything the media should be looking at inflation targeting and find the study that proved it was a good idea in the first place, because I can't.

We should also question if printing money (capital) makes us richer or poorer and if suppressing the price of capital (interest rates) results in better decision making when allocating capital.

Do you reward investors or speculators??? Or perhaps provide stability so that people can make decisions without having to factor in inflation.

This is the Share Trader website so I suspect the answer is speculators.

‘People saw prices going up 10-20% a year so wanted to jump on the band wagon as people do in speculative mania.’

————

It was all enabled by retail banks acting like crack dealers, because unless you’ve got mad piles of cash sitting around then you can’t ‘jump in’ ordinarily. At least not to the extent we saw where people were prepared to pay any old price. But as you say, every Tom, Dick, and Harriet was jumping in.

“If you can keep your head when all about you
Are losing theirs…” and all that.

Personally I’m glad I don’t buy into these mass speculative mania events like some headless chook.

[Aaron]

Personally I’m glad I don’t buy into these mass speculative mania events like some headless chook.

We should probably feel sorry for the people forced to sell especially if they are losing their equity, but if my memory serves me well you were angry at the RBNZ and banks for pushing house prices to ridiculous levels. Forced selling will bring house prices back to levels that might be considered normal.