Whether you’re among those already forking out $2000 more each month in added mortgage costs, or you’re heading towards a fixed-rate rollover with a growing sense of doom, there’s no doubt (even before the Reserve Bank forged ahead with another major OCR increase) that Kiwi homeowners are feeling the biting impact of higher mortgage rates.
I’ve been here before. I struggled to pay a mortgage in 2006, as rates hit 9%, and worked through three major recessions. in 1991, 1998 and 2008.
So, as we grapple with the challenges of cutting costs and re-jigging finances to meet the added expense of increased home loan repayments, here are a few tips to help you prepare for – and survive – higher mortgage rates.
1: Higher mortgage rates: you can’t overestimate the power of a budget
For most of us, a lot of spending happens on auto-pilot. And unless you’ve actually stopped and gone through the process of tallying it all up, you’d probably be surprised as to where your money is going.
The first step is an obvious but important one: just going through the process of building a budget to see how much you’re spending, on what, and where you might be able to cut back.
I went through the process a couple of months’ back, and the thing that really caught me by surprise was how much money was going on subscriptions we didn’t want or need. Stuff like the kids’ old Xbox sub they hadn’t used for years, and the full suite of Netflix, Neon, Apple TV, etc, that we weren’t watching. Even if they’re only $15 a pop, it all adds up.
A free and simple way of sorting your budget is by downloading a couple of months’ worth of bank statements into Excel, or Google Sheets, and categorising all of your transactions. It doesn’t take as long as you’d think.
But if navigating Excel sounds like torture, there are plenty of tools out there that help to make the process super easy. PocketSmith is one, which, once you’ve downloaded all your bank data, categorises your income and expenses for you automatically.
2: Don’t bury your head in the sand about what next year will look like
If you’re heading for a fixed-rate rollover in the coming months, don’t wait until the problem’s really breathing down your neck. Now’s the time to work through exactly what those higher interest rates are going to mean for your finances.
Once you’ve got your budget sorted, the real value is in working out what your new mortgage repayments will look like and adding that figure into the equation.
As an example, someone going from 3.5% to 6.5% early next year will see their repayments increase by $175 per month per $100,000 of mortgage.
At 3.5%, repayments are $500 per month per $100,000 – while at 6.50%, repayments will be $675 per month per $100,000. That marks a 35% increase in the cost of your mortgage.
People generally assume mortgage repayments double when interest rates do, but that doesn’t consider the fact that a big part of your payment is going towards the loan principal. It’s only the interest component of the payment that is effectively doubling.
Once you know the damage, then ask, how are you going to make up the difference? What changes can you make so you’re in a better position when those extra costs do eventually hit?
I can’t emphasise enough how important it is to be planning ahead right now, giving yourself as much time as possible to make the necessary adjustments to get your house in order.
3: You can save a lot just by being a little smarter with your money
When you want to save money, nights out are generally one of the first things to go, along with all the other “nice to haves”.
Eating out has definitely become more expensive in recent years, but I find that what usually makes up most of a restaurant bill isn’t necessarily the food. It’s the drinks.
If you don’t want to give restaurant meals up completely, but still want to smash costs, skipping the alcohol can be one way to do it. You’re generally there for the food anyway, right? Even if you have a couple of drinks at home, grab an Uber, then skip the wine with dinner, it makes a big difference.
Then, when it comes to takeaways, we’ve gotten into the habit of doing half-and-half: buying the meat dish, and making a salad.
And, of course, there are lots of other little ways you can save by just being a bit smarter with how you’re spending. Stuff that we all know but maybe aren’t doing as well as we could.
Some people have a sixth sense for knowing when meat’s on special at the supermarket. You can sometimes get up to 40% off by shopping that way. Then there’s stuff like only buying veges that are in season, and working off a shopping list, so you’re not tempted to buy anything you don’t really need.
4: Higher mortgage rates: sell assets you don’t need
Another way to tap into additional funds is by selling off assets you no longer really need, such as second cars, TVs, tech stuff. In our household, we’re always selling our old stuff on Trade Me, and we’re seeing a lot more of that happening at the moment.
Work out how much extra you’ll need to find over the next 18 months – on a $500,000 mortgage, that could equate up to $15,750 – and then seen if you can cover that difference by selling assets.
As running a car is getting increasingly expensive, it could be worth considering whether dropping to one car is a realistic option. On average, that could save a city-bound commuter about $1300 per month, once you factor in everything like parking, petrol, WOF, insurance and maintenance.
5: Keep your KiwiSaver up if you can
If you’re contributing more than the minimum to your KiwiSaver, there’s no harm in dialing that back to 3% if you need to. But while temporarily opting out of KiwiSaver altogether might seem like a really easy way to tap into extra funds, it’s a path best avoided if you can manage it.
You’ll free up a bit of extra income to help with cashflow, sure, but you’re also effectively giving up 3% of your income in the form of your employer contribution, which will stop for as long as your contributions do.
That said, if you really need it, taking a KiwiSaver holiday for between three and 12 months is an option. I did it during the first round of COVID, when things were looking really scary and uncertain, and I have no regrets. But it’s something I would only ever recommend as a last resort.
6: Avoid consumer finance at all costs. And consolidate your debts
When money gets tight, it can be really tempting to use the balance on the old credit card to help bridge the financial gap – letting it creep up, so you can maintain a certain lifestyle.
But any high-interest consumer finance “solution” is a really bad idea in this sort of environment, because it can easily become a downward spiral.
It’s something we saw a lot of in the post-GFC era, people who relied heavily on consumer finance options, rather than adjusting their spending habits, and it can be incredibly difficult to recover from.
Generally speaking, I’d say now’s the time to nix the car loans, credit cards, anything where there’s a high-interest cost involved. Consolidating those sorts of loans back into your mortgage is a really effective way to significantly reduce cashflow burn in the current environment.
7: Higher mortgage rates: consider interest-only
I’ll preface this next bit by saying that the banks are usually pretty reluctant to let owner-occupiers move onto interest-only terms. If you genuinely can’t afford your mortgage payments, they’d much rather you sell the house than kick the problem down the road and likely create bigger challenges for the future you.
But, that said, there are some cases when the banks might be open to interest-only as a short-term solution.
One example could be a young family where one partner has recently gone on maternity or paternity leave – so they’re not on full income, but there’s a clear end-point for when their financial situation will ease. In that instance, a period of interest-only will just help make that adjustment a bit easier.
Importantly, you’ll still need to pass bank servicing calculations to be eligible. But if you tick the servicing box, then your bank should be willing to look at putting you on interest-only terms for a year or two.
8: Applying for other support
If you’ve made all the adjustments you can and you’re still not able to meet more costly mortgage commitments, the good news is there’s a lot of consumer protection in place for homeowners experiencing hardship.
Lenders will work with you to find a way of helping you through – something we saw playing out a lot during COVID, with banks offering repayment holidays as one way to help alleviate the burden.
9: Remember, there’s light at the end of the tunnel
There’s no doubt the next 12 to 18 months are going to be tough. About as tough as it gets.
But the interest rates we’re seeing out there now are already well above the levels needed to start bringing the economy under control. And as we see more and more evidence that the economy is slowing, interest rates will stop going up – and may even start to come back a little bit, potentially by the end of next year.
So, while it might feel like there’s no end in sight, the challenge created by higher interest rates should be a short-term issue.
If you can batten down the hatches and find a way to make it work over the next year or two, there is light at the end of the tunnel – and hopefully that’ll help to make the whole experience feel that little bit more manageable.
John Bolton founded Squirrel in 2008. He is a former General Manager at ANZ, where he was responsible for the bank’s $60bn of retail lending and deposits. He has 10 years of senior banking experience behind him in financial markets, treasury, finance, and strategy, and is a director of Financial Advice New Zealand, the industry body for financial advisers. Check out Squirrel’s website for how Squirrel helps first home buyers, here.