At the current juncture, servicing New Zealand’s household debt is ‘manageable’ because interest rates are low – the Official Cash Rate is at a record-low of 1.75 per cent even though we are a decade into an economic expansion.
In recent years the cost of servicing high debt levels has been stable at around 8 per cent of household incomes owing to low interest rates.
When it comes to debt servicing, composition matters: high debt with low interest rates is very different to low debt with high interest rates.
When debt is high, households’ debt-servicing burdens are more sensitive to changes in interest rates. In terms of New Zealand’s structural vulnerability, this means households are more exposed should interest rates rise.
Serviceability and debt