Expert warns of one-year mortgage rates passing 7%

Homeowners need to prepare for mortgage rates touching 7% for one-year terms following yesterday's news that inflation has barely moved.

Stats NZ said yesterday that inflation is at 7.2%, defying predictions it could have dropped to around 6.5%.

As the Reserve Bank continues to bring inflation down to its benchmark 1-3%, it's tipped next month's official cash rate announcement could see it go up as much as .75 basis points.

It currently sits at 3.5%.

CoreLogic NZ chief property economist Kelvin Davidson said despite already taking aggressive action, the Reserve Bank would likely be pushing the OCR up further.

"That peak of 5% now looks fairly plausible so could imply a mortgage rate on a fairly standard one-year term of maybe even 7.5%," he told 1News.

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"A big change, so that’s going to mean quite a big change for household finances."

Up to 44% of mortgage holders were due to refix, meaning those who secured one-year fixed loans at between 2 and 3% could expect their rate to double.

"It’s a bit shift and when you convert it into dollar terms, it’s a big chunk of income. So there’s going to be some stress coming on and when you think about other cost of living stresses as well, petrol prices have fallen a little bit but not that much, there’s a lot of strain coming on."

Davidson said while banks carry out serviceability tests, the margin between what people could pay and what they do pay is narrowing.

"People will just have to adjust those finances and be pretty careful, and you’d think there would be a tipping point somewhere where, actually, it becomes a little bit too much of a stretch for people."

ASB economists predict the OCR will peak at 5.25% by April, while ANZ, Kiwibank and Westpac economists are tipping 5%. BNZ think the Reserve Bank will stop the rises at 4.5%.

In its latest property market and economy update, Core Logic predicted further falls in property values in coming months.

"Comparing the current downturn to the GFC, one big wildcard is low unemployment, and nobody’s expecting it to suddenly spike higher. Strong employment should help to keep a floor under home values, and be the difference between a correction and a more serious slump."