If you have a mortgage, chances are that your interest rate has already gone up significantly or is about to.
Whilst most economists think that mortgage interest rates likely won’t go much higher and could start to fall as soon as late this year/early 2024, anyone coming off a rate in the 2’s, 3’s or 4’s this year will be seeing a big jump up in their interest rate and payments.
For some homeowners this increase in payments will be large. And it’s a double whammy to the finances alongside the rapidly rising cost of living (NZ’s current high inflation rate).
So what can you do to ease the pressure on your household finances and keep the wheels turning?
First things first – review your budget and see what unnecessary expenses you can cut. If you don’t have a budget, now’s a good time to start one. There are many free online budget tools including on sorted.org.nz and our website loanmarket.co.nz/coast-to-coast/, or Raglan Community House offers free budgeting services.
Some banks have budget tracking built into their banking apps such as ASB’s ‘Track my spending’ or Westpac’s ‘Cashnav’ which makes the budgeting process much easier.
If you’ve been through your budget and tightened the belt already, there are many ways you can reduce your mortgage repayments. Here are a few common options:
Extend the loan period: You may be able to apply to take the loan term back out to 25 or 30 years which could reduce the payments. It’s important however that when you’re able, you increase the payments again to get back onto a decent repayment period or you’ll end up paying a lot more in interest.
Swap to interest only payments: Banks have in recent months become more open to homeowners temporarily switching to interest only payments. This could be for 6-12m typically for a homeowner and will take a lot of the sting of higher rates out. Once the interest only period finishes your payments revert back to principal and interest and will be higher than it otherwise would have been.
Payment deferral: Otherwise known as a ‘mortgage holiday’, banks may look to pause your payments for a period of 3 months. This can help you build up funds to get through, but the interest still gets charged and compounds. Your payments will also increase after you restart payments and your credit file could be impacted.
Access excess funds in the loan account/s: Some banks will allow you to redraw funds that have been overpaid into the loan over time. This typically shows on your internet banking as the difference between your balance and ‘available balance’.
Refinancing with a new lender: Banks are hungry for new business at present and most are offering cash incentives of 1% of your loan amount to refinance from your current bank. You can use this cash incentive to cover the difference between your old low rate and your new higher rate, or you can use it to pay off 1% of your mortgage. Banks often come out with special low rates which can only be accessed if you borrow new money so you can’t access them for ‘refixing’ your rate.
Note that everyone’s situation is different so seek professional advice to find out the pros and cons before you make a change. Choosing an option before researching the short and long term impacts can prove very costly – we have the tools to quickly work out what the options will mean for you.
