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Elevate Magazine
October 10, 2024

Most Borrowers Opting for Short-Term Fixes, Quick Impact of Falling Interest Rates Expected

most borrowers opting for short term fixes, quick impact of falling interest rates expected

The share of “non-performing” loans—those at least 90 days overdue or deemed impaired—has risen to 0.6 percent of all mortgages, property economist Kelvin Davidson said. 

Davidson noted that, although the current rate is only about half of what it was in 2009 and 2010, it remains a concern and could potentially rise further due to increasing unemployment. 

“Based on RBNZ, the trading banks themselves recently seem to have been raising provisions for possible future ‘bad’ housing loans, to the point where these allowances are now about 40 percent above even the largest COVID-era figure,” he said. 

He also noted that mortgage stress will continue to be an important factor to monitor for the foreseeable future. This is another reason to be cautious regarding the magnitude and durability of any increase in house sales and prices as we approach 2025.

For him, the numbers were not “off the charts,” but they were certainly rising. He said they often acted as a lagging indicator, as borrowers made every effort to avoid defaulting on their loans.

Davidson also mentioned that many borrowers were choosing short-term solutions, suggesting that the impact of declining interest rates would be experienced fairly soon.

For instance, in December of last year, 36% of new loans were issued with a fixed term of up to 12 months. However, that figure surged to 56% by February and hit a new record high of 68% in August, primarily due to a significant increase in six-month activity following the initial OCR cut.

“On the other hand, one can understand why borrowers are now choosing to take shorter fixed periods in the hope they will benefit from a series of loan renewals in the coming year or two at ever-lower rates,” Davidson stated.

“I have heard some people are now taking a mix of six months, 12 months, and 18 months and hoping to spread the terms and always having something coming up for renewal so they can take advantage of rates as they go down,” he added.