Interest rates: paying until it hurts?

Press, 19 February 1986, Page 15

Interest rates: paying until it hurts?

In Residence

by

Sarah Sands

Mortgage interest rates increased again last week, contradicting last year’s predictions that 1986 would be the year that interest rates started to fall.

One of Canterbury’s three main lending institutions, Trusteebank Canterbury, increased its rates for new mortgages by 2.5 per cent to 21.5 per cent, saying it had to do so in order to pay higher deposit interest rates.

The new rate will also apply to existing mortgages.

Another lending institution, the United Building Society, also Increased its rates. Society members now pay 22.5 per cent while non-members pay 23.5 per cent on a 20 year mortgage, with a range of discounts for shorter-term loans. United’s announcement came only three weeks after it opened lending to non-members.

In spite of the high interest rates, financial institutions say that demand for mortgage finance is still strong.

United trebled its mortgage lending to more than $7 million a week (on a national scale) after opening its coffers to nonmembers.

In January, traditionally a slow period for finance, the Post Office lent $2.7 million in Canterbury, the average for the past few months.

The Housing Corporation assisted 450 local people in the three months to December 31, lending a total of $10.5 million.

Trusteebank’s manager, Frank Dickson, said he could not hope to fill the total demand for mortgage finance. Unfortunately, nobody is willing to say if or when interest rates will decrease.

The public affairs manager for the United Building Society, Tony Kunowski, said he believed that the high interest rates would stay for some time. "I think we will be looking at the current in-

terest rate structure for at least 18 months to two years. Rates won’t be coming down in the near future — economic conditions, if anything, are going the other way.” He said demand for mortgage finance was high even with the rate of

interest. “The real estate market is picking up at the moment — people who dug in their toes because of high interest rates, believing they would come down, are now buying.” Since United opened finance to non-members.

lending had increased significantly, he said. Many people were refinancing their existing mortgages. In particular, many borrowers were switching from short-term solicitors’ loans, with an interest rate of 20 to 22 per cent, to a building society loan where interest rates did not add significantly to immediate repayment costs.

He maintained that higher interest rates enabled United to increase mortgage output.

"We have raised our rates — we don’t believe that anybody in this country has yet determined what price people will pay for mortgages.” Frank Dickson, of Trusteebank, said he had given up predicting what

would happen to interest rates.

Everybody would like to think they were going to come down but it may be some time before this happened, he said. Two prominent Wellington economists were saying that rates would not drop until 1987 — "I hope they are wrong and I think all the public should hope they are wrong.” "Some people mistakenly think that at times of high interest rates bankers rub their hands in glee but that's not the case.

“At the moment those with money are looking for as much as they can get for it while those who want to borrow want to pay as little as they can for it and we (the bank)

The mortgage treadmill goes on . . . and no-one will predict a downward trend.

are the unfortunate intermediary,” Frank Dick-

son claimed. "People who take on mortgages today at the high rate at least know what the repayment factor is — people who took them on at 11 per cent are the ones we should feel sorry for.” With the higher deposit rates attracting more money, Trusteebank is hoping soon to be in a position to offer people likely to have difficulty paying their mortgage the opportunity of making only interest payments until interest rates come down. At present this scheme is open only to those with existing mortgages. Frank Dickson said that most people still elected to pay some principal while taking advantage of the offer. In spite of high interest rates, Trusteebank had had few mortgagee sales. The only mortgagee sales were those where people were genuinely unable to make payments and this had only happened three times in the bank’s history. “We’re proud of our record and don’t expect to blow it,” Frank Dickson said. The Housing Corporation’s loans manager, Brian Atkins, has found that more people had been seeking refinancing from the corporation as a result of high interest rates. “Some families are feeling the pinch and experiencing genuine hardship and we are seeing more of those than before,” he said.