The recent Official Cash Rate (OCR) increase from 3.5% to 4.25% has sent a clear message to Kiwis: Brace for impact.
This comes after a year of gradual increases in a bid to combat inflation, so as we battle the rising cost of living, many of us will also be battling the rising cost of our mortgages.
So what’s a girl Kiwi to do?
The impact of this recent hike will depend on your individual situation. The more debt you have, the more pain it’s possible you’ll experience. But there are some ways you can minimise the impact of these increases and set yourself up to bounce back once interest rates start going back down.
So, don’t be afraid of what’s happening with interest rates. Take a breath, get clever and go headfirst into the headwinds.
Here’s what you can do.
Revisit your mortgage term
While paying off your mortgage as soon as possible is admirable, you don’t want to do that at the cost of flexibility. If you have a shorter mortgage term (i.e. less than 25 years) you could look to lower your repayments by extending the term of your mortgage.
By extending the term, you lower the repayments required by the bank, giving you some breathing space while you weather the current storm.
Refinance to another bank
To extend your mortgage term, talk to your bank first and if they can’t help you could explore the option of refinancing to another bank. Banks tend to be reluctant to extend the terms of their current mortgages, so you may have more luck negotiating a more favourable term with a new bank.
Even if you aren’t looking to extend the term of your mortgage, refinancing to a new bank can still work in your favour due to current cash incentives. Some banks are offering a cashback of 1% of the value of your mortgage, which can go some way toward lessening the impact of the increase in interest rates.
However, your current bank may charge you a break fee for breaking your current mortgage, so any financial benefits you get from switching will need to be weighed against that.
Restructure your mortgage
You can also build extra flexibility into your mortgage by adding a revolving or offset credit to your mortgage structure. But these aren’t for everyone, and they incur a higher interest rate than fixed-term mortgages, so they require a solid plan and discipline to use them effectively.
Used correctly, they offer another opportunity to divert additional funds onto your mortgage without incurring penalties for paying it off faster than your bank may like. And they offer flexibility by having that money available to you in case unexpected expenses arise.
What if I have an investment property?
If you have an investment property, these increases in interest rates will likely translate into an increase to your top-up amount. So, you’ll need to look at ways to minimise that as much as possible.
Alongside looking into the mortgage tips above to get your repayments down you could raise the rent – though that will only go so far (and you don’t want to necessarily alienate good tenants).
And you’d be looking to build a buffer so that even if you do go backwards in the next year, that’s been absorbed into the mortgage.
Anything else I can do?
While we know Kiwis don’t like being told to save money – especially if that advice cuts out the things that make life fun – if rising mortgage rates are putting pressure on your finances, checking where you can cut costs may need to be part of your strategy.
Start by looking at the money you’re spending unconsciously, subscriptions or memberships you’re no longer using, and your utilities to see if there are cheaper options.
If you’re struggling to find where you can cut costs, it may be worth chatting to an adviser (like those you can find at enable.me) who may be able to spot opportunities you can’t.
The key thing to remember – is that this is likely to be temporary.
While the Reserve Bank is predicting the OCR to rise to 5.5% next year – which will likely impact mortgage rates – some economists predict that these rates could start dropping again in 2024.
This means about a year of potential tightening of the belt and deferring costs where necessary.
And, if you can get through this period of time without going backwards, or even get ahead, the tailwind you’ll experience once interest rates start to decline could be incredible.
Disclaimer: This blog post is for informational purposes only and does not constitute individual financial advice. If you’re interested in receiving personalised financial advice, you can book in a consultation with an enable.me coach. Costs apply.
