Is this the new normal? Bank raises mortgage rates to almost 7%

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Kiwibank is raising interest rates on a number of its home loan terms as homeowners face the prospect of more expensive than expected mortgages.

Kiwibank raised its standard two-year rate from 5.55% to 5.85%. Its special lifts go from 4.55% to 4.85%.

For three-year terms, its special rate and standard rates each increase by 20 basis points respectively, to 4.99% and 5.99%.

Its five-year standard rate is now 6.79%, down from 6.16% previously. Reserve Bank data shows five-year rates haven’t been this high since mid-2014.

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The other big banks have five-year rates between 5.69% and 6.09%.

The rate of interest rate increases surprised many commentators. In March 2021, the five-year average rate taken by borrowers was 3.78%. In February of this year, it was 5.47%.

For borrowers with a $500,000 home loan, the difference between these two rates is just over $220 per fortnight, over a 25-year loan term.

A significant increase in repayments is becoming a reality for more borrowers – Reserve Bank data shows $68 billion in homeowner loans need fixing over the next six months. Another $100 billion will be repaired within six months to a year.

According to the first forecasts, interest rates on real estate loans to individuals would peak at around 5%.

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Kiwibank has increased a number of home loan rates.

Infometrics chief forecaster Gareth Kiernan said that would have been based on a forecast of an official peak in cash rates of 2% to 2.5% by 2023.

“But with expectations that it could now reach 3% to 3.5% next year, the projected trajectory affects longer-term rates. We also saw an increase of around 50 basis points in bond rates 10-year rate over the past month, so Kiwibank’s 5-year rate looks about right given wholesale interest rate developments.We currently expect 5-year fixed rates to peak at around 6% in the first half of next year, but there are still upside risks to this outlook.

NZIER chief economist Christina Leung said she expects floating rates to be around 6.25% five years from now, with an OCR of 3.5% – although that is still a long way off and “ anything can happen by then.”

“The high inflation backdrop means that interest rates around the world will rise, so there will certainly be further mortgage rate increases to come.”

A recent Reserve Bank analysis showed that if mortgage rates rose to 5%, nearly 20% of recent first-time homebuyers would face mortgage issues.

At 6%, that would rise to almost 50%, and investors and some existing homeowners would also be under pressure.

Kiwibank also raised term deposit rates by 10 to 50 basis points. It now pays 3.2% on $10,000 invested for two years, down from 2.7% previously.

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