A higher percentage of new borrowers are extending their mortgage to 30 years to reduce the payment amount. Photo / 123RF
Demand for loans and credit cards has fallen while those behind on their payments for existing debt are on the rise, according to data from credit reporting agency Centrix.
Keith McLaughlin, managing director of Centrix, said the Omicron crisis and impending inflation had started to have a tangible impact on Kiwi consumer confidence.
“Overall consumer credit demand is down 6% year over year, while average credit scores have fallen three points in the past month.”
Demand for home loans was particularly hard hit, with mortgage applications down 12% and demand for credit cards down 35% year-on-year.
Demand for personal loans also declined, falling 8%, although demand for auto financing remained strong.
McLaughlin said his agency had never seen demand for credit cards drop so quickly.
“I think it’s a combination of factors, definitely buy now, pay later – I think it’s had an impact. I also think inflation has an impact because people are more conservative in their approach to expenses.”
He said there had been a drop in demand for credit cards for some time, but it had gotten worse now.
McLaughlin said mortgage applications have not recovered since changes were made to tighten the Credit Agreement and Consumer Credit Act in December.
The government has since announced some adjustments although these will not come into force until June.
“Even then, some of the anecdotal information I get from our credit grantors is that they have their systems in place and spent a lot of money on it and they’re not just going to throw it away.”
McLaughlin said arrears were also growing across the board as Kiwis began to struggle to repay in the face of rising costs of living.
“It’s just a lack of money for everyone. If the grocery bill goes up and the gas bill goes up, there’s less money left in the pocket.”
Arrears increased 5% year-over-year in March 2022, due to increased late payments for personal loans, buy-it-now accounts, later payments and telecom payment plans .
He said that historically the level of arrears had been higher, but there had been a decline in arrears and defaults over the past three or four years.
“We’re now starting to see a reversal of that. You wouldn’t want it to be a prolonged decline.”
McLaughlin said if inflation was a short-term problem, the problem might self-correct, but if it dragged on and income didn’t keep up with spending, the problem would be exacerbated.
Arrears on personal loans had risen to 9% – the highest level since May 2020 – while arrears on buy now, pay later accounts had risen sharply to the highest level since March 2020.
“Personal loans and credit cards are unsecured and people will always pay their mortgage before paying their single loan.”
But interest rates on personal loans and credit cards were higher than on mortgages, so the impact of missed payments could be quite severe.
The value of new mortgages fell 30% in March from a year earlier, although it remained above the amount of new loans in March 2020.
But it also found that more borrowers were taking on the 30-year debt. This figure has increased from 48% in 2018 to 57% of new mortgages issued in 2022.
Mortgage arrears rates had also started to rise – an early sign of growing financial difficulties and a potential sign of future problems.
McLaughlin said he doesn’t expect mortgage sales to pick up for some time.
“Typically, there’s enough equity in the property for an orderly sale, although if properties start to stay on the market longer and backlogs explode because people can’t liquidate their properties, you don’t know what will happen…”
But he said banks wanted to work with borrowers, so any mortgagee sale would likely be a last resort.
Recovery of small businesses
While demand for corporate debt remained down 7% year on year in April, there was a decline in credit defaults, with the retail and hospitality sectors showing signs of recovery.
In the retail trade, payment defaults fell by 10% in March compared to the previous month and by 5% for the hotel industry.
“Hopefully this trend will continue, which will create some activity in the economy.”
But agriculture and tourism faced the strongest headwinds as labor
shortages, supply chain disruptions and rising costs continued to be a challenge.