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    Interest rates are famously hard to predict, but this recent jump seems to have caught economists off-guard. The Reserve Bank of New Zealand has increased the official cash rate (OCR) twice in the past two months to 0.75% in a bid to cool inflation and help stabilise the economy – and it’s expected to go up again at the next review. Inflation and interest rates tend to go hand in hand, and an increase in the OCR directly influences what banks do with mortgage rates.

    We might not have a crystal ball to predict the future, but we can provide some tips for paying off your mortgage as quickly as possible – without the added stress of increasing interest rates.

    1. Aim for 8%

    If you’re in the market for your first home, make sure that the mortgage repayments are within your budget, with an 8% interest rate every week. That way, you’ll regularly be paying off an extra chunk while interest rates are low, and meeting repayments easily when interest rates are high. It’s a win-win!

    The same goes if you already have a home loan. Every time you get a pay rise, pay off a loan or cut an existing expense, redirect that money to your home loan so you’re paying off an amount matching – or more than – an 8% interest rate repayment.

    Just because interest rates are rising doesn’t mean you can’t mitigate that extra long-term accumulation of debt by paying off your mortgage in 20 years – rather than 30.

    2. Fixed or floating?

    Just last year, interest rates were so low that the cheapest option (without much risk), was to fix your rate for one year, rolling to another one-year term after that. This provided people with some certainty for at least 12 months during the initial uncertainty of COVID-19, and if interest rates dropped even lower, they’d be in a position to take advantage of the change. But in the world of interest rates, things can move quickly.

    Currently, New Zealand’s average floating rate stands at 4.59%, and the average two-year fixed rate is 4.25-4.35%. It’s still not bad compared to the sky-high rates back in 2008, when the floating rate peaked at 10.72%. But with recent changes in the economy, higher interest rates could be on the horizon – and you’re better to be prepared.

    It may be safer to fix your loan for a longer-term, like two – three years, if you don’t want to risk another increase. ASB’s Nick Tuffleys says, “Fixing for some of the longer terms provides interest rate certainty for the next few years, but at a higher cost than the cheaper short-term rates. For those who want this longer-term interest rate certainty now, the cost of fixing for two to five years is still very low compared to the past twenty years.”

    The decision between fixed or floating comes down to whether you want flexibility or security, while also considering the historic ups and downs of the market.

    Prepare for a rise and avoid any surprises

    For mortgage holders and soon-to-be homeowners, there is no clear-cut answer that guarantees long-term savings. However, there are ways you can prepare for and mitigate the extra cost of rising rates. Increasing your repayments now will keep you ahead of the curve and make your life less stressful later.

    Trying to decide what your best move is in this tumultuous market? We’re here to help! Call Global Finance today, and we’ll talk you through all the best mortgage options available to make sure you’re set up for success.

    **These are general guidelines and are by no means a reflection of bank or lending policies