Inflation in Aotearoa has hit a three-decade high and is showing no sign of slowing. Rises in inflation are usually followed by increased interest rates and if inflation grows too high, wages start to decrease in value. This means household incomes and the value of savings begin to go down and the cost of living goes up.
New Zealanders are facing an increase in food, petrol and interest rates, and households will have little choice but to cutback to try and meet surging living costs.
So what can you do when your money buys less?
Firstly, it’s a good idea to have a financial plan in place. Now is always a good time to think about the impact of mortgage interest rate increases, and what it would mean in terms of repayments and whether they can afford them. If you need help with this, you can talk to one of our financial advisers. That’s our job.
Let’s talk mortgages
How much you’ll be affected by raising interest rates over the next couple of years depends very much on what type of mortgage you have. The first step is to therefore find out whether your mortgage is floating or fixed, and when your current term ends.
If you don’t know, ring your bank or mortgage provider to find out. 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.
Looking at restructuring your mortgage
Restructuring your home loan may be an option. Many of us tend to set and forget our home loans: we fix a rate for a set period, budget how much to pay each month and walk away. But things change, and these changes could cost you thousands.
Refinancing is basically transferring your home loan from one bank to another. You pay off your existing loan and take out a new one so you can take advantage of more favourable terms, pay down a part of your mortgage, or consolidate debt. Do you have any hire purchase, car or personal loans that perhaps could be consolidated on your home loan to reduce the repayments and interest cost?
Going from monthly to fortnightly payments
If you can cope with a relatively small increase in mortgage repayments, it might be possible to switch from monthly mortgage repayments to fortnightly. By paying every two weeks instead of every calendar month, you effectively are paying the loan more frequently which will bring down the principal amount of your home loan. This reduces the total amount of interest you’re charged over the life of your loan, saving you money. You will need to talk to your bank to arrange for this and there might be charges, so check with one of our mortgage specialists first.
An interest only mortgage
It may well be that rather than paying principal and interest on the whole home loan, some part could be restructured on principal and interest payment and some on interest only.
An interest-only mortgage is where you pay the interest charged on the loan, and not the amount borrowed. You repay the full loan amount when the term finishes.
Interest-only mortgages can work in certain situations: on a day-to-day basis, having a cheaper interest-only mortgage means your disposable income is higher than it would be with a repayment mortgage. However, Interest-only mortgages make the total cost of borrowing higher than repayment mortgages because you don’t pay off any principal. Interest costs keep being accrued and the loan still needs to be paid off. There is also a risk that your spending may increase because you haven’t taken into account repaying the original debt in full.
When done well, restructuring a loan can save you time and money, but you need to figure out whether it is suitable for you and your financial situation, so make use of an experienced expert.
Savings tips on the cost of living from the press
If you have been following the media lately, you’ll have seen there have been a number of articles on how to meet the rising cost of living, some with very ‘helpful’ suggestions from having cold showers to eating porridge for breakfast or taking in ironing as a second job. But working out what you can afford and creating a budget and see if there are any areas where you might be able to cut back is a very good idea.
Coping with inflation comes down to reviewing how you spend your money
If you don’t use a budget to manage your spending, it’s very hard to know where you stand. A budget can provide a feeling of control, instead of just wondering where all money has gone. It can mean the difference between being able to plan as opposed to going into panic mode. Are there any discretionary expenses that can be cut or reduced?
Cutting on costs
Trimming discretionary day-to-day spending can have a big effect while not completely destroying your sense of happiness in life. Try finding multiple small cutbacks by going through your bank or credit card statements line-by-line. You may find you’re spending little amounts a lot. If you can make a number of small cutbacks, they do add up.
Make sure you’re on the best deal
Check if there are any ongoing subscriptions that you could live without or have forgotten about. The least painful cutbacks are the invisible ones, so shop around for phone, electricity and internet providers. Try using comparison sites to see if you’re on the best plan. Reducing bills by $10-$20 a month adds up to big savings over the course of a year.
Try using apps and the Internet to find lower prices when shopping, particularly for petrol. When prices are relatively stable, we’re less inclined to invest time shopping for bargains, as it might not make all that much of a difference. When prices are changing, you might think of shopping as an investment in time to find better deals.
From small things, big things grow
Also, counting up just how many coffees and lunches you buy each week may also help. A coffee and a sandwich on one day might not feel like much, but over a week, it’s a good $75.00, easily. Small changes can mean quite big savings quite quickly.
Managing money can be challenging, so a financial adviser could be a great help
Not just anyone can call themselves a financial adviser. Our professional advisors have to meet a certain standard of competence and treat you ethically. They focus on your individual goals and current financial situation, and they balance your needs over the short, medium and long terms. Our advisers are there to help you avoid trouble, secure the best deals and ensure the most positive outcome for your future. Get in touch.
**These are general guidelines and are by no means a reflection of bank or lending policies