If you’ve had these thoughts, you are not alone. The sudden movement of interest rates is having an impact on society. And perhaps the most significant impact is on new homeowners who purchased their first home or upsized their mortgage on a new home right after COVID when interest rates were at historically low levels.
In May of 2020, just as the full impact of COVID was being felt and many of us were in lockdown, the Reserve Bank of New Zealand dropped the Official Cash Rate (OCR) to 0.25%. At the time, there was even talk of potential deflation (falling prices) and negative interest rates, as Europe has experienced. As events unfolded, the OCR stayed very low for well over a year until October 2021, when it began to rise all the way up to 5.25%, where the rate sits as of early April 2023.
While very conservative investors will be relieved, if not happy, that they can once again earn a reasonable level of interest on their cash, bonds and term deposits, for borrowers, it’s a different story. In May 2020, you could borrow money with interest rates as low as 2.25% or slightly higher for longer-term loans. Those very cheap loans are starting to roll over and being reset at much higher interest rates.
As of 17 April, ANZ offered a home loan rate of 6.59% for borrowers with at least 20% equity and an ANZ transaction account. Rates for other borrowers started at 7.34% for one year.
The impact of higher mortgage interest rates is substantial. Imagine in May 2021, you secured a two-year interest rate at 2.50% on a new home, borrowing $800,000 for 30 years. Your fortnightly payments would have been $1,458. If you had to roll over that loan today at, say, 7%, your payments would increase to $2,455 a fortnight. That extra $1,000 per fortnight is a huge expense for many borrowers.
So, what can be done?
The key here is planning. Here we have outlined some suggestions we’d encourage you or anyone close to you to consider.
- Contact a professional and get the facts.
Not all mortgage brokers are the same. If you’re not sure who to speak to, contact us, and we’ll put you in touch with someone. Also, find out what you owe and what interest rate you’ll likely be reset to and get a sense of how much additional interest you’ll pay per fortnight or month. Use online calculators like the one available on sorted www.sorted.org.nz/tools/mortgage-calculator.
- Act now as if you already need to cover that expense.
For example, if your mortgage will increase by $1,000 each fortnight and you get paid fortnightly, take $1,000 out of your normal home expenses account and place it in a special savings account. Now, act as though the money isn’t there for the next two weeks. Doing this allows you to simulate what it will be like, and what it will take to live without that money. Can you do it? If not, you’ll need to look hard at your budget.
- Budget. You’ll need to get clarity on precisely what your discretionary expenses are. For many of us, they are holidays, eating out, streaming, gym memberships, and maybe even those takeaway coffees. You won’t want to give up any of those, but doing so may be a better tradeoff than not being able to make your interest payments. Sorted also has a good budgeting tool if you need a place to start www.sorted.org.nz/tool/budgeting-tool.
After simulating your extra mortgage payment, it’s possible that you still can’t make ends meet no matter what you do. In that case, there are other options you may be able to explore.
- Negotiate with your employer. Salaries are often reviewed in April or early in the new financial year. This may be the right time to talk to your employer about a raise to help you keep up with rising costs. But don’t just come asking for more money. First, do some research. If you know more money is available at other companies, bring that into the conversation. Ensure you’ve written down your accomplishments. Don’t expect your employer to know them all off-hand. Ensure they know that you believe in the company and its direction and are a team player. Be confident and put your request in writing.
- Negotiate with the bank. With your mortgage broker, you can explore many different options. The sooner you speak with the bank, the more options you’ll have available to you. Other banks may offer more competitive interest rates.
If that’s the case, you could consider moving your loan. Banks may also be willing to offer some payment variations, such as accepting ‘interest only’ for a year or two, or perhaps you could discuss extending the loan term.
- Consider other ways to raise money. If you’ve just bought a house and you have a spare room, people are always looking to rent, especially in university towns. This could mean several hundred dollars a month, making all the difference.
The point is if you notice a potential shortfall coming, you can plan to do something to help mitigate it before it arrives. And the more time you have available, the better. Often the best way to prepare for unexpected financial downsides is by being thoughtful with unexpected financial upsides. For example:
- At different points of the interest rate cycle, when you may be able to roll over loans at lower interest rates, keep the same regular payment amount. This will shorten your mortgage term and reduce overall interest costs.
- Similarly, when you get a raise, top up your regular mortgage payment by the same percentage as your raise.
- When you get an unexpected bonus, use a pre-planned percentage to pay down some of your loan.
Utilising these financial upsides to pay off debt more quickly helps create a buffer for when any downsides might arise. If borrowers had been applying these rules for a few years, they’d be in a much better position to absorb the current increased interest rates, perhaps without changing their repayment.
The main takeaway from this article is simple: if you have reason to be concerned about friends and family and the impact of rising interest rates on their financial and emotional health, please share this article and let them know there is help available.
As Advisers, we have connections and can help point them in the right direction. And with a little bit of planning, it can help them navigate through this current difficult period.
26 April 2023
Article provided by Consilium.