The squeeze is on. The cost of living has soared and prices are still increasing at 6% per year. The Reserve Bank of NZ (RBNZ) cut the Official Cash Rate (OCR), which influences the cost of borrowing money, to a record low of 0.25% back in March 2020 and kept it there for 18 months in order to support the economy and get people spending at a time when we were being locked down in our homes and it seemed like serious recession was inevitable.
What resulted was a massive spending party. Everything from property to cars to spa pools, clothing, everything. The super cheap money inspired Kiwis to purchase like there was no tomorrow at a time when supply of goods and services were severely constrained by Covid lockdowns around the world. So prices went up. And they’ve continued to go up to the point where we have a cost of living crisis.
The RBNZ has been attempting to combat price inflation by increasing interest rates and since September 2021 the OCR has increased by 5.25% to now sit at 5.50%. This is the fastest increase in the last 30 years.
40% of all mortgages in NZ are due to come off their current low fixed rate before the end of 2023. A lot of these mortgages will start with a 2 or a 3 and be moving onto a high 6 or even a 7%.
We’re receiving on average 10 enquiries per working day from people wanting help with their increasing rates; which really means help to keep the bills paid and the roof over their head.
Here are some of the common suggestions for households who are struggling with the higher rates and payments. We’ll work out the numbers on a $400,000 mortgage which is pretty common here in Raglan. A $400,000 mortgage going from 3% to 4% would see an increase in payments of around $224 per week.
Re-do your budget. Cutting out the unnecessary subscriptions, shopping at the cheaper supermarket, etc can add up to make a big difference. A lot of families don’t have a budget – if you don’t know what you’re spending it’s hard to make cutbacks.
Extend the mortgage loan term. If you’ve had your mortgage for a while it could make quite a difference to extend the loan term out. For example someone who took out a $400,000 mortgage 10 years ago on a 30 year term could save around $87/week if they extended the loan term back out to 30 years. As this would add another 10 years onto the loan repayment period, when rates fall again payments can be kept at the same level or increased to get back on track.
Refinance to a different bank. Some banks are offering large sums of cash (up to 0.9% of the loan amount) to secure your business. One bank even has a free refinance service meaning you’d get to keep all that cash. You could use that cash to help cover the higher payments. For example, a $400,000 loan could attract $3,600 cashback which is $69/week to help cover those higher payments. Interest rates can be quite different between banks too. You could save 0.5% by looking at a new bank which on that $400,000 loan amounts to $38/week.
Look to move to Interest Only payments. Banks are being a bit more flexible with this option at present. A $400,000 loan at 7% over 30 years would see principal and interest payments of around $612/week. Moving to Interest Only payments would reduce this to $538/wk. It’s important to note that when your Interest Only period finishes your payments will be higher than they originally were, so it’s important to understand the numbers on this.
Mortgage deferment. Sometimes banks will grant a 3 month period where you don’t have to make any payments. This can take the pressure off and allow you to build up a buffer to help you make those higher payments. The downside is that the interest charges are added to the loan each month and your loan size increases. Again, when your payments resume they will be bigger than they originally were. Again, knowing the numbers on this is critical.
Get onto it early. Don’t wait until the last minute as most of the above options can take a while to arrange. You might find that doors close the longer you leave it. Speak to your bank or Financial Adviser at least 60 days before your interest rate expires.
Do your homework on rates. It can be tempting to take the cheapest interest rate on offer at present, which right now are the longer term 3-5 year fixed rates. This is very unusual for NZ, where it’s normally cheaper to fix short term. Many economists think interest rates will start to fall into 2024/2025 so do your homework before just taking the cheapest rate – it could end up a lot more expensive in the long run.
*The above is not individual financial advice. Speak to a registered Financial Adviser for individual Financial Advice and to run through the pros and cons of the above options for your situation.
