Are you, your children or loved ones, concerned about their mortgage as a result of the sudden rise of interest rates? Perhaps you may be concerned that there is a need to help someone financially when their interest rates reset?

If you’ve had those thoughts you’re not alone. Some investors are thinking the same. The sudden movement of rates is having an impact on society. And perhaps the most significant impact is on new homeowners who purchased their first home or upsized their mortgage on a new home right after COVID when rates were at historically low levels.

In May of 2020, just as the full impact of COVID was being felt and many of us were in lockdown, the Reserve Bank of New Zealand dropped the Official Cash Rate (OCR) to 0.25%. There was talk at the time of deflation and negative interest rates such as Europe has experienced. As it happened, the OCR stayed low for well over a year until about October 2021 when it began to rise all the way to 4.75% where the rate sits at the start of April 2023.

While our saver clients will certainly be relieved, if not happy, that they can once again earn a reasonable level of interest on their cash, bonds, and term deposits; for borrowers it is a different story. In May 2020 you could secure a loan for as little as 2.25% or slightly more for longer terms. Now those loans are starting to roll off the books and are being reset at much higher rates.

ANZ is currently offering a rate of 6.54% for borrowers with 20% equity and an ANZ transaction account. Other borrowers are looking at 7.14% for one year[1].

The impact of higher mortgage interest rates is substantial. Imagine in May 2021 you secured a two-year rate at 2.50% on a new home borrowing $800,000 for 30 years. Your fortnightly payments would be $1,458. Once you borrow at 7%, your payment increases to $2,455[2] a fortnight. That extra $1,000 per fortnight is a huge expense for many borrowers.

So, what can be done?

The key here is planning. Below we offer some real suggestions that we’d encourage any of our clients or their loved ones to consider and the sooner the better.

1. Contact a professional and get the facts. Not all mortgage brokers are of the same quality. If you’re not sure who to speak to, contact us and we’ll put you in touch with someone. With or without a professional, find out what you owe, what you’ll likely be reset to and get a sense for how much additional interest you’ll pay per month or per fortnight. Use online calculators like the one on sorted https://sorted.org.nz/tools/mortgage-calculator.
2. Act now as if you’ll need to cover that expense. For example, if you’ll have another $1,000 to cover each fortnight and you get paid fortnightly, take $1,000 immediately out of your account and place it in a special savings account. Now act for next two weeks as though the money isn’t there. Doing this allows you to simulate what it will be like to live without that money. Can you do it? If not then you’ll need to pull out your budget, leading to our next point.
3. Budget. You’ll need to get a handle on exactly what your discretionary expenses are. For many of us they are holidays, eating out, streaming, gym memberships, even (gasp) coffee. You don’t want to give up any of those, but doing so may be a better trade off to not being able to make your payments. Sorted has a good budgeting tool if you need a place to start https://sorted.org.nz/tool/budgeting-tool

It’s possible after simulating your extra mortgage payment, you can’t make ends meet no matter what you do. There are other options to explore.

4. Negotiate with your employer. Often salary gets reviewed and updated in April. This may be the right time to talk to
your employer about a raise to keep up with inflation or better. Don’t just come asking for money though. Do some
research. If you know there’s more money available at other employers then bring that into the conversation. Ensure
you’ve written down your accomplishments. Don’t expect your employer to know them off hand. Ensure they know
you believe in the company and its direction and that you’re a team player, be confident and put your request in
writing.

5. Negotiate with the bank. With your mortgage broker, you can explore many different options. The sooner you
speak with the bank, the more options you’ll find available to you. Other banks may offer more competitive rates,
consider moving. Banks may be willing to offer you to pay interest only for a year or at most two years. Or perhaps
you can extend the term of the loan back to 30 years.

6. Consider other ways to raise money. If you’ve just bought a house and you have a spare room, there are people willing to rent especially in university towns. This could mean several hundred dollars a month which would make all the difference.

The point is, once you notice a short coming you can plan to do something about it.

Of course, the best way to deal with an unexpected financial downside is with unexpected financial upside. For example:

• When you’re on the other end and you renegotiate rates lower, keep the same payment.
• When you get a raise, top up your mortgage payment by the same percentage as your raise.
• When you get an unexpected bonus, use a pre-planned percentage of it to pay down your mortgage.

Using the upside to pay off debt more quickly, you create a buffer for the downside. If borrowers had been using these rules for a few years, they’d be in a better position to absorb the increased rates, perhaps without even changing their payment.

The main takeaway from this article is simple, if you have reason to be concerned about the impact of rising interest rates on yours, or a loved one’s financial situation or even emotional health, please share this article and let them know that there is help available. As advisers we’re willing to speak with the loved ones of our clients and we have connections to help point them in the right direction. With planning we can help get our homeowners through this difficult period.

[1] https://www.anz.co.nz/personal/home-loans-mortgages/loan-types/fixed/

[2] https://sorted.org.nz/tools/mortgage-calculator