Debt service costs to leap $100 a week

Higher debt servicing costs will add $80 a week to the ‘‘average’’ household budget by the end of next year, ASB economists say, and an extra $100 by the end of 2024.

On top of that, total outgoings would increase by $70 a week, on average, if people did not adjust their spending patterns.

The economists have updated earlier work on the pressure that borrowers will come under as rising interest rates increase the cost of carrying debt.

They said household debt servicing costs would increase across the country by $8 billion next year and nearly $12b by the end of 2024.

This would swallow up much of the expected increase in household incomes over the next few years, they said.

But the impact would be uneven, with highly indebted households facing considerably higher costs.

People who had bought a house more recently were likely to face much bigger increases in costs than those who had owned for a while.

‘‘Discretionary spending will be hard hit and we foresee recessionary conditions for the household sector in 2023,’’ the economists said.

The average mortgage rate that borrowers were paying would move above 4.5% by the end of this year and peak at around 6.75% in mid-2024. They said, even if the official cash rate was cut in 2024, average borrowing costs were unlikely to move lower until 2025.

People who were coming off a 2.59% rate fixed in December 2020 would be refixing on to 6.75%, an increase of $300 per week on a $500,000 mortgage.

The average mortgage for firsthome buyers at the moment is about $600,000.

‘‘Our concern is that the households that have built up savings post-Covid may not be the ones that need to find additional funds to cover higher debt servicing costs and have enough to get by,’’ the economists said.

‘‘For many borrowers, increases in debt servicing costs will be sizeable, running into the hundreds of dollars per week.’’

The resulting slowdown in spending could lead the Reserve Bank to move to a slower pace of official cash rate increases in time, they said.

‘‘The return to a lower inflation environment will eventually make life much easier for households. But in the interim, sizeable OCR hikes will mean higher debt servicing costs that will place some household budgets under considerable pressure.’’

They said Reserve Bank data showed household debt at about $340b, or just under 175% of households’ disposable incomes and slightly more than 90% of nominal gross domestic product.