Mortgage interest rates are expected to keep rising while inflation remains at an historic high*, leaving many homeowners concerned about the impact that increased mortgage repayments will have on their budget. While some may be facing real financial pressure, for others it’s likely a case of riding out the tough times, plugging away at the mortgage, and looking at ways to reduce household spending. Here are some thoughts on what to do about rising mortgage interest rates.
Work out how bad it really is
For the past year, the Reserve Bank of New Zealand has been increasing the Official Cash Rate (OCR) to dampen consumer spending and tackle high inflation. While inflation remains at high levels, the RBNZ is expected to undertake further substantial monetary policy tightening in an effort to rein in inflation in 2023.
With a large number of homeowners due to refix this year, the first step is working out what repayments are going to look like when refixing at a much higher interest rate. That should provide some insight into how the household budget will need to be tweaked to accommodate an increase in mortgage repayments.
Use your bank’s online home loan calculator or this one on the Mortgage Express website to work out your mortgage repayments using a range of interest rates. Thereafter you’ll be well placed to make an informed decision about your next steps, which could be either of these:
Restructure your home loan
Mortgage interest rates are just one important factor when it comes to determining the overall cost of a mortgage: how the mortgage is structured is just as critical, and can make a significant difference to the amount you repay to the lender.
Mortgage restructuring is the process of setting up a home loan in such a way that it saves the homeowner money, both in terms of the mortgage repayments and interest charged by the lender.
Changing the terms of your mortgage could provide some relief to your budget. If you’ve had a mortgage for a while, or your mortgage was financed for a shorter term, you may be able to restructure your home loan to a longer loan term and reduce your repayments.
For example, a loan of $500,000 on a rate of 6% would cost you $1,379 a fortnight over 30 years versus to $1,482 over 25 years. (These calculations are an approximation only and should not be regarded as being final. The figures will vary depending upon fees, charges and calculation methodology used by the lender.)
Additionally, splitting your home loan and spreading your risk over a number of loan terms could help minimize the risk of higher mortgage repayments as interest rates continue to rise.
Using knowledge of the property market and the finance industry, a Mortgage Express branded mortgage adviser can help to restructure your home loan with the most appropriate combination of fixed and floating interest rates, terms and home loan repayment amounts.
Refinance your home loan
Moving your mortgage to a new lender could be a viable option if you’re nearing the end of your current loan’s fixed rate term, or your mortgage was initially financed at a much higher interest rate because of a high LVR.
Refinancing is the process of transferring your existing home loan from one bank to another. Essentially it means repaying your existing loan and taking out a new loan at a different bank. Where lenders are offering discounted rates or cashbacks for new customers, refinancing to a new lender could mean significant savings in the long run.
Of course, refinancing also comes with significant costs, such as break fees, which could outweigh any savings on interest rates, so it’s best to seek financial advice from a mortgage adviser before proceeding on this route.
Hold on and ride out the storm
The interest rate cycle is closely related to the economic or trade cycle, which means, in theory:
- If the economy is growing strongly and inflation is high, the RBNZ will increase interest rates to slow down the economy and reduce inflation.
- If the economy enters a recession with falling inflation and rising unemployment, the RBNZ will cut interest rates to stimulate the economy and increase the rate of economic growth.
Whatever the future holds for interest rate movements in New Zealand, key to riding out the storm is being flexible and ready to adjust your financial plan.
As always, for professional mortgage and financial advice tailored to your specific situation and circumstances, contact Mortgage Express and we’ll put you in touch with a mortgage adviser in your area.
*https://www.rbnz.govt.nz/hub/news/2022/11/higher-interest-rates-necessary
