Economists and financial analysts are predicting at least an extra 1.5 per cent increase to many New Zealand mortgage interest rates, and that greater rises will soon follow.
1.5 per cent? That’s not much at all. Not an issue.
It’s doubling your money
Well, actually it is an issue, and potentially a very worrying one for some more recent home buyers. It is an issue that could place strain on household budgets and impact spending for the people who have bought homes over the last 18 months.
Let’s look at the maths. Very simply, if you’re sitting on a mortgage with a 2 per cent interest rate, an increase of 2 per cent is in fact an increase of 100 per cent. You will be paying double for your current mortgage. Are you set up to cope?
As a rough guide, if you were to have bought the median Auckland house, at a value of $1.15 million, and you had a 20 per cent deposit and have a 2.55 per cent one-year mortgage, at 3.99 per cent interest, you could be paying $509 more per fortnight.
Steady as she goes
Some analysts are forecasting that changes are likely to be small, but steady, so while a 0.25% rate rise might not set alarm bells ringing, several consecutive raises could have a significant impact.
The table shows how much more you’d have to pay on a $200,000 mortgage with an interest rate of 2.5% on a 25-year loan term and monthly repayments are $897 as mortgage interest rates increase.
But what can I do?
It’s a good idea to have a financial plan in place to deal with potential interest rate changes, particularly for those who have entered the NZ housing market since 2014 and have only experienced low-interest rates. People who have recently bought in Auckland and Wellington and have a pretty mortgage may well be in for a bit of a shock.
Get a good back-up plan
Banks are warning borrowers that now is the time to think about their exposure to mortgage interest rate increases. They are not suggesting that these increases will be unmanageable for all of us, but they are saying that while your current home loan might be serviceable, it is important to think about what it would mean in repayment terms when rates do start to go up.
You need a back-up plan; you need to understand your stress points and you probably need to do a budget and stick to it.
Tips for managing an interest rate rise on your mortgage :
1. Find out what mortgage you’re on
How you’ll be affected by upcoming interest rate rises depends greatly on what type of mortgage you’re on – floating or fixed – and when your current term ends. If you don’t know, check your paperwork or ring your bank or mortgage provider to find out.
In a recent ANZ report quoted in Stuff, 76 per cent of New Zealand mortgage debt was either on floating rates or due to be refixed in the next 12 months. If you need to change, talk to one of our mortgage brokers at Global Finance to make sure you’ll be on the best rate.
2. Work out the impact
Once you are clear on what type of home loan you have, you will be in a better position to find out how an interest rate rise will affect your finances. Use our mortgage calculator to work out that impact.
3. Plan for the future
If your mortgage calculations indicate that you are currently in a good financial position and can cope with a relatively small increase in mortgage repayments, then start building up a savings buffer so you’ll be able to afford the higher repayments that are very likely to hit in the future.
Like all financial goals, saving a home loan buffer requires discipline, which is why speaking with a mortgage broker before making any hasty decisions is important. They’ll be able to determine the best strategy based on your circumstances and spending habits.
Getting ahead by paying more than the minimum while interest rates are still low is a good idea. If you are on a fixed mortgage, it may be a while before interest rate rises hit you in the pocket, so take advantage of the low rate you’re currently enjoying and pay extra off your mortgage.
Any payments you make will bring down the principal amount of your home loan, so the amount of interest you’re charged over the life of your loan is reduced, saving you money. An extra $200 a month on a 30-year home loan of $500,000 at 3% would drop your term by three years. There are limits on how much you can overpay and there might also be charges, so check with your mortgage provider or one of our mortgage specialists first.
4. Make sure you’re on the best deal
Mortgage deals are not the only deals that can save you money. Finding multiple small cutbacks on household bills does add up over time and the least painful cutbacks are the invisible ones, such as power bills, gas bills and phone bills. Try using comparison sites to see if you’re on the best plan for you.
5. Work out what you can afford
If your mortgage repayments are likely to go up, you may want to create a budget and see if there are any areas where you might be able to cut back. Trimming discretionary day-to-day spending can have a big effect while not completely destroying one’s sense of happiness in life and this great budgeting tool is not too painful to use.
Many households can find savings on their spending, and one of the easiest places to do so is food and drink. This may be bad news for the hospitality sector, but eating at home, taking lunch to work and limiting those ‘proper coffees’ can add up to big savings.
6. Just in case
The next place to find mortgage relief may be with insurances. None of us can predict the future, not even financial analysts. If you’re suddenly unable to work, how will you meet those mortgage repayments? Mortgage repayment cover can help by making sure your home loan repayments are paid if you become sick, injured or disabled. Get in touch with one of our mortgage and insurance advisers to ask about mortgage protection insurance and how it can pay your mortgage and meet other living costs when you are not able to work.
7. Still worried about how mortgage rises could affect you?
You don’t have to be in financial trouble to seek help. Our advisers are there to help you avoid trouble and can assist with budgeting, they can review your home loan and they can provide specialist insurance advice. That is precisely what the experts at Global Finance are there for: to help you secure the best deals and ensure the most positive outcome for your future. Get in touch.