While many may wish for a return to the golden days of 2020-2022 – when it comes to mortgage rates at least – the likelihood that interest rates will ever drop that low again is about as low as those interest rates were.
While it’s not predicted that interest rates will stay as high as they are right now either, it’s still worth knowing what you can do when mortgage rates are high, or on the rise, so that your financial progress doesn’t have to slow down.
Consider the impacts of rising interest rates
The impact of a mortgage rate hike will depend on your individual situation. The more debt you have, the more pain it’s possible you’ll experience. Luckily, there are some ways you can minimise the impact of interest rate increases and set yourself up so you can take full advantage when interest rates start going back down.
So, here’s how you can face higher mortgage interest rates head-on:
Look at ways to amp up your cashflow.
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. You could also look at ways you can add to your cash flow – like getting in a boarder, selling things you no longer need, or finding other ways to increase your income.
If you’ve exhausted those options, it may be time to look at the mortgage itself, to see how it can be managed to ease some of the pressure.
Revisit your mortgage term
When looking to reduce the cost of your mortgage repayments, you might be considering switching to an interest-only home loan or even going on a repayment holiday. Another option, if you have a shorter-term loan (i.e. less than 25 years) is to extend the term of your mortgage.
All these options can lower the required repayments to the bank giving you a bit of breathing space.
But while these options help ease some of the financial pressure you’re feeling and save you money right now, they’re likely to cost you more in the long term. So, where possible, look for ways to pay off your mortgage faster than the term agreed with your bank when you have the capacity to do so.
Refinance to another bank
To change 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. Most banks will offer some form of cashback as an incentive to switch your banking to theirs – this can go some way toward lessening the impact of the increase in interest rates, cover the legal fees of switching, or just be a nice added bonus of switching to a bank with better rates.
However, your current bank may charge you a break fee for breaking your current mortgage, you may encounter cash reward clawbacks, or have to pay new valuation fees when making the switch. So, any financial benefits you get will need to be weighed against any associated costs.
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. They incur a higher interest rate than fixed-term mortgages, so require a solid plan and discipline to use them effectively (especially when mortgage rates are on the higher side).
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.
The key thing to remember is that the housing market moves in cycles, as does the economy – so if interest rates are high now, it’s probable they’ll come down again in the future. It’s not so much a question of ‘if’ but ‘when.
If you can get through without going backwards, or even get ahead, the tailwind you’ll experience once interest rates do start to decline could be incredible.
Feeling the pressure but unsure of where to start? Book a consultation with an enable.me financial adviser and coach – they’ll be able to help you uncover where you may be able to cut costs, and how you can better structure your mortgage to help you in both the short and long term. (fees apply)
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.