What to Do if I Can’t Repay My Mortgage?

What to Do if I Can’t Repay My Mortgage?

Become Wealth Editor

A global pandemic and resource instability due to political turmoil have brewed the perfect storm for sky-rocketing inflation. Kiwis have really been feeling the pinch this year, as annual inflation is sitting at 7.2 per cent for the September 2022 quarter according to Stats NZ.

Food prices have soared a whopping 10.7 per cent in one year, with consumer price manager James Mitchell citing “increasing prices for cheddar cheese, yoghurt, and standard two-litre milk” as the culprits for the hike in grocery prices.

As the financial pressure mounts and society struggles with the cost of living, the Reserve Bank of New Zealand (Reserve Bank) is fighting a seemingly dire battle against inflation. Unfortunately for homeowners with a mortgage, the only significant tool the Reserve Bank has to keep prices from exponentially rising is increasing interest rates. In layman’s terms – when the cost of money is higher, people have less to spend and demand drops, curbing rampant prices for consumer goods and services.

In November, the Reserve Bank told Kiwis to “tighten your belts and prepare for recession,” after hiking the official cash rate (OCR) 75 basis point to 4.25 per cent (the biggest increase since it was introduced in 1999) in an attempt to curb inflation. Things aren’t stopping there, as the Reserve Bank signalled more is to come.

It pays to remember that our property market just experienced an unprecedented boom, facilitated by Covid and an unsatiable demand for housing. House prices rose by more than 40 per cent from 2020 to November 2021 and have already plunged 10 per cent this year. TradeMe reported a four per cent drop in November 2022 alone, marking the largest year-on-year drop in five years.

Interest rates were remarkably low in 2020, and many of us who signed onto 2.3 per cent mortgages are now finding themselves with rates around 7.5 per cent. For someone with a $600,000 mortgage, fortnightly principle and interest repayments at 2.3 per cent would have been $1,065, at 7.5 per cent they are $1,935. The cost increase is significant and, coupled with general cost increases caused by inflation, it’s no surprise to hear murmurs of a wave of mortgagee sales.

Homeowners up and down New Zealand are crunching their numbers, considering what costs to cut, whether they can pick up a side hustle, if they should get a flatmate or in the worst-case scenario – sell their home.  

This Leads Us to Mortgagee Sales

A mortgagee sale often occurs when a property owner can’t meet their repayment obligations to the bank. The mortgagee (the bank) sells the property to recover the money the bank is owed.

When it comes to money, preparing for the worst-case scenario is often the best option. The OCR could likely reach 5.5 per cent in 2023 and homeowners can expect interest rates of eight per cent.

New Zealand has experienced record-low mortgagee sales in recent years, but the tides have definitely begun to turn. CoreLogic data shows an increase in mortgagee sales this year, with six in the first quarter, 20 in the second and 28 in the third.

As Stuff reports, Trade Me figures show that the number of mortgagee sales listed was up 25 per cent last month compared to the same time last year. This number is still low, however, with Stuff reporting only 27 mortgagee listings in early December. As of mid-month, there are now 16.  

A clifftop Auckland home in the desirable suburb of Devonport failed to sell at a mortgagee sale this month. With a 2021 CV of $5.25 million, the highest bid was $2.1 million which auctioneer Barfoot & Thomson turned in.

So, what do I do if I can’t meet my new mortgage rates?

1. Assess your financial situation. Sitting down and assessing your spending is highly recommended (with the help of a financial planner if you can spare the cost). There are likely expenses that can be reworked and breaking your fixed-term mortgage may be advisable depending on your personal financial situation.  

2. Refinancing. A financial adviser who specialises in mortgage advice (commonly called a mortgage broker) can help you figure out if breaking your current loan term and refinancing with another lending institution is a favourable option.

3. Interest-only payments. Opting for an interest-only payment situation will reduce your monthly expenses as you repay purely the interest and no capital on your loan. The downside is this will prolong the length of your loan and could put you at more risk for future rate increases, however, when times are truly tough this is not a laughable option. When house prices are increasing, and you are gaining liquid equity this can be a good option.

4. Renting. This option is not straightforward and requires weighing up the pros and cons. Let's start with the positive – if you have access to cheaper and suitable accommodation, renting out your home to meet mortgage requirements is probably a great option. However, managing rental property is complex in New Zealand. Getting your property to comply with the healthy homes rental standards in New Zealand can be costly, especially with the costs of construction these days. You will pay approximately 30% of your rental income in tax, and new laws mean that mortgage interest is no longer a deductible expense. If you are striving to save money it’s likely you won’t want to pay a property manager, and the stresses that come with managing tenants can be surprisingly pertinent.

5. Deferring your loan. Although this is no long-term fix, it can be the immediate relief people need to reconfigure their financial situations. Banks aren’t particularly keen on this option so negotiation will be required.

6. A poignant piece of advice is to keep calm and carry on. Rising OCR and interest rates are beyond individual control, and although they have massive ramifications, catastrophising over something you can’t change won’t help this situation. In times like these, it pays to remember the saying “this too shall pass.” The property market oscillates in peaks and troughs. If you have the ability to weather the storm, things will most likely improve again – although no one can say when.

The graph below, comprised of REINZ statistics, shows the undulation in property prices, but overall a steady incline.

Figure 1: Source globalpropertyguide.com

It’s Not All Bad News

The GFC devastated families and homeowners across the globe, and the good news is no one wants a repeat of that.

Kelvin Davidson, chief property economist of CoreLogic doubts mortgagee sale rates will rise to what we saw in the GFC. For instance, in the July quarter of 2009, CoreLogic shows 777 mortgagee sales – we aren’t anywhere near those numbers yet.

Davidson points out that mortgagee sales were already happening at a higher level pre-GFC compared to today. We are starting with a much cleaner slate. Davidson has said that “bank attitudes have also changed, and every bank person I speak to says the same thing - no one wants a mortgagee sale if it can be avoided, so there are other strategies, such as interest-only loans or lengthening the term of the loan, they will look at to try and avoid one.”

A key differentiation between now and the GFC is employment rates. What generally breaks the final straw on the camel’s back is when people lose their jobs and their incomes. The unemployment rate remains low, although the Reserve Bank does predict it to rise to 5.7% by 2025. Talent is still sought after in New Zealand, in fact, we are experiencing a labour shortage - there is some comfort to be held in that.

It pays to remember that not everybody signed on to mortgages during the historically low interest rates of 2020-2021. Many homeowners have experienced mortgage rates around 6-7% before then and the size of a considerable amount of loans will have reduced.  

Harcourts managing director Bryan Thomson notes that mortgagee sales are usually catalysed by external factors such as business failure, divorce, and death.

Yes the pressure is on, and those who do roll from low interest rates to high will most certainly feel the pinch, but it’s not all doom and gloom yet.

It’d be the pleasure of one of our trained professionals to help you work through any of the topics mentioned above, or any other personal financial matters, simply get in touch today.

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