Your Interest Rates Have Doubled, Now What?

Many New Zealand homeowners are about to be, or have been, hit with interest rates double (or more) than what they were previously paying.

How will you be dealing with the increase?

NZHL Rotorua City Business Owner Sally Copeland’s best advice? DON’T PANIC, take a step back and look at what you can control.

For many, panicking is a default reaction when they feel like they have lost control – particularly when finances are stretched to cover growing expenses – your home loan being the biggest.

But panic doesn’t help you make sense of a situation and being in a frantic mode of ‘I’ve lost control’ isn’t going to lessen the impact.

Of course, increased mortgage repayments to cover higher interest costs (not to mention the cost of living) are stressful. There’s no denying this will impact your lifestyle, especially when the increase is significant.

But let’s take a step back and put this into perspective.

If you look back over time, it’s still a historically low-interest rate environment. With average interest rates hitting around 7 / 7.5% (at the time of writing) it’s more of a shock for those coming off a lower rate, such as 2.9%, than for those entering a high-interest environment.

While this may not seem overly helpful for newer homeowners who previously haven’t been in a higher-rate environment, it’s about taking your head out of the sand, accepting our current economic conditions, and reaching out for advice.

When you dig into your financial plan, it may not be as bad as you think, but you need to talk it through with an expert – that’s what your NZHL Mortgage Mentor is here for. They are fully qualified financial advisors (holding a level 5 Qualification) who can help you look at your options and see where you can take back control.

Lessons of the interest rate cycle.

Feeling unprepared for interest rate rises?

You’re not alone.

This interest rate cycle has shown home loan borrowers how interest rates fluctuate – even when you lock in a low-interest rate, they will probably go lower again. However, they won’t always be low, so the best thing you can do is focus on reducing your home loan and therefore your interest costs while you are in a position to do so.

At NZHL, we encourage our clients to (wherever possible) pay a bit more than the minimum required repayments. So, if interest rates go up, they are somewhat sheltered from the additional costs as they are already used to a higher payment and are working to pay down their loan faster in the meantime.

Get your structure right and reduce your risk.

While you should always get advice tailored to your specific circumstances, generally, we recommend our clients split their loans into portions fixed over different loan terms (two or three) to diversify your risk.

Rather than your whole mortgage coming off a fixed term at once, your fixed terms are staggered to limit the impact and avoid a massive jump in costs if the rates have shifted.

Plus, if your home loan is structured to use your available money against your interest costs, you can pay it down much quicker, reducing your risk moving forward (and giving you a nice buffer to fall back on).

About to refix? 

No one can predict with certainty what will happen next, so rather than focusing on trying to refix at the perfect time to get the best interest rate (which you can’t control) your energy is better spent reviewing your home loan and planning ahead.

An NZHL Mortgage Mentor can work with you to consider your plans for the next 1,2,3, or even 5 years to tailor a structure that best supports you.

For example, if your budget is a little tight, we could consider longer fixed terms to give you more certainty and limit your exposure to interest rates increasing. If interest rates were to drop, you would be fixed on higher rates for longer.

However, if we compare the feeling of ‘I’m paying a bit more’ to ‘How am I going to cover the cost of higher payments’ – I know which I would choose.

On the flip side, if there is surplus money in your budget or you know an income increase is on the horizon, and you’re comfortable taking on a bit of risk, you may choose to go with shorter terms (1 – 2 years) with lower rates.

Ultimately, while we can’t control the interest rate cycle, we can set up your home loan structure so that every dollar is working towards saving you the most money over the life of your loan and allowing you to repay your mortgage over a shorter term.

And remember, your NZHL Mortgage Mentor is here for the long haul to ensure you still have the best structure when circumstances change.

You’ve refixed, now what?

Now is the time to review your expenses and understand where your money is going. Taking stock of your finances can highlight areas you can trim back on – even small amounts add up over time (unused subscriptions or memberships?).

While this sounds tedious, I turn it into a monthly date night where my partner and I go through what we’ve spent versus our budget. Not to work out the exact numbers but to keep our spending and budgets front of mind.

It’s about retraining your brain to become more aware of the tangibility of money and think about purchases every time before you swipe – it’s easy to lose track of spending, especially with payWave and buy now pay later facilities. I also recommend setting a spending budget and withdrawing that money as cash. Once it’s gone, it’s gone!

Pay rises & additional income.

Interest rates and the cost of living have increased expenses for homeowners, however salaries have also risen over the past year.

People tend to alter their spending to match a pay increase, which is understandable when on a stretched budget. But if you have previously been managing on less income, it’s a great idea to put the increased amount aside to build up your buffer/emergency fund.

The benefit of a home loan arranged by NZHL is the ability to offset your interest costs with your buffer while still being able to access the funds if needed.

And, if you haven’t seen a pay rise in a while, it’s also a great time to look for promotion and upskilling opportunities that allow you to add more value to your employer and hopefully put you in a position to request a pay rise.

While it’s not realistic to think everyone will receive a pay rise, there are alternatives to generating additional income if needed – do you have a spare room you could rent or put on Airbnb? Or can you increase your work hours (part-time – full-time)?

Time is money

Admittedly, taking the time to pre-prepare and tweak your day-to-day requires effort, but in doing so you will likely reduce stress by feeling more in control of your budget which I believe is worth it.

A couple of things to consider:

  • Being more organised with your food; make your lunches and plan out meals in advance
  • Consider your mode of transport; can you walk more regularly (rather than driving), is public transport cheaper than petrol and parking, or are there options for free parking rather than paid?

A few small changes to your routine can take quite a lot off your budget.

And lastly, build a buffer.

A lot of people get really stressed when they have no backup or emergency funds. If this is you, I encourage you to set up an automatic payment that transfers into a Savings or Transactional Mortgage Account.

It needs to be realistic and consistent – so rather than tightening your budget too much, you’re better off starting smaller and getting used to putting aside that amount. Start by testing your willpower to give up coffee, alcohol, or takeaways for a week and see how much you save – you can gradually increase the amount you save if it’s sustainable.

I find having a buffer helps to take back the feeling of control and leaves you feeling empowered. And, while any buffer is good to have, pulling money into and back out of savings regularly is unlikely to give you the feeling of financial control.

It’s about gradually building your emergency fund and financial well-being. If you’re struggling to leave your savings alone (and you don’t genuinely need to spend it), ask your NZHL Mortgage Mentor for help – there are options to limit your ability to access your savings without talking to us first. Likewise, if you’re feeling overwhelmed or concerned reach out and we can help you make a plan to take back control.

And remember, a good home loan structure will use the money you save to give you the double benefit of reducing your overall interest costs.

Come in and talk to us, we’re here to help determine your options and what will work best for you.

Please note –Sally Copeland is a Local Business Owner and Mortgage Mentor at NZHL Rotorua City and has written this blog based on her experience. This blog is intended to be general in nature and should not replace personalised financial advice by your mortgage adviser.