If you’re bracing yourself for an upcoming mortgage rate increase, you’re not alone. Only two years ago, the average one-year fixed rate was 2.58%. Now, it’s more than double. For an average-size home loan in New Zealand, this means a significant increase in what you’re paying each week. The question is, can you afford it? If the extra pressure has you worried, what can you do to still live comfortably without losing your home? We spoke to Aseem Agarwal, Head of Mortgages at Global Finance, on how to ride out this storm.
Get a financial assessment
When facing a higher interest rate, it’s important to take stock of your finances. A mortgage broker will help you pin down the new numbers and determine how much you can realistically afford. Aseem notes that interest rates are similar for most banks, so rather than looking around for better deals, it’s better to focus on other solutions.
“Alongside the rising cost of living, you may find that the new interest rate will make things tight. But there’s no need to panic just yet. Your mortgage broker can help you organise one of three options.”
1. An interest-only loan
Your first option is to pay just the interest you’re charged on the loan and not the principal amount you borrowed. For example, if your mortgage is $600,000, and your new interest rate is 6.84%, instead of paying $3928 per month for principal and interest, you pay $3430 for interest only. That’s a monthly cost reduction of $498. It’s ideal for covering a short-term situation as it keeps your repayments as low as possible. However, Aseem notes that for large loans, it should only be used when absolutely necessary.
“When you’re not paying the principal, you pay more for your house overall. That’s why an interest-only loan is a temporary solution. We like to re-look at the client’s financial situation every year.”
2. A mortgage holiday
During the first COVID lockdown, banks started offering temporary holds on loan repayments for people facing severe financial stress, and now it is necessary again for some people. Aseem says a mortgage holiday is a great opportunity to take a break from repayments, but it doesn’t mean your bank will pick up the tab later.
“It’s an option that allows breathing room, but the higher interest rate will continue to be charged on your loan. That’s why it should only be used as a last resort.”
Each bank will have its own process to apply for a mortgage holiday. To make things simple, ask your mortgage broker to advise you. Once you’ve applied, the bank will contact you to discuss your circumstances and determine whether you meet their criteria.
3. Extend your mortgage term
By spreading your loan out over a longer period, you can reduce your monthly repayments, making your new interest rate less of a blow. If you currently have a shorter mortgage term, for example, 20 or 25 years, you may be able to extend to the maximum 30-year loan. Like the previous two options, you should be mindful that it will cost you more in interest overall.
Don’t panic – take action
The jump in repayments will be challenging for many, but it may only be short-lived. Canstar predicts that interest rates will start to go down as soon as next year. If you can hang on while the market returns to a more sustainable level, your home will continue to be a great long-term asset. Regardless of your financial situation, a mortgage advisor can help guide you through the change, evaluate your goals, and recommend the best course of action.
Need help managing your finances? Talk to the team at Global Finance today.
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