Feeling Panicked? Strategies To Deal With 7% Interest Rates

On Monday, one of New Zealand's top banks hiked their interest rates by 0.2%, taking their 1 year fixed rate to 7.25%. Mortgage Adviser Neville Modlin from The Lending Team says “Seeing the 1 year rate pass the 7% mark was a shock to many Kiwis. This combined with another possible Official Cash Rate (OCR) increase later this month, and it's understandable why thousands are feeling anxious about interest rates and their mortgage repayments.”

Neville goes on to share three strategies to help those facing 7% interest rates:

• When applying for a mortgage, focus on the weekly mortgage repayments

Instead of only focusing on the interest rate, pay close attention to the expected mortgage repayments.

Neville says that with every client, he emphasises this crucial question, "What are you comfortable spending on a mortgage each week?” That answer is the repayment budget. It’s important to ‘be realistic’ at this stage, including the additional costs that come with owning a home such as rates and insurance. “Those applying must also consider how the rising cost of living, including the recent loss of the petrol subsidy, may put a squeeze on their monthly budget,” says Neville.

He goes on to say “Your repayment budget should influence the mortgage you apply for, rather than the maximum you can borrow." Neville highlights that the mortgage repayments at your maximum borrowing might be above your budget.

For example, if you’ve decided you’re comfortable spending $1,000 per week, that's a mortgage of about $650,000 (*At 7%, 30 year term, P&I - T&Cs apply).

However, if the bank says you can qualify for a mortgage of $800,000, the estimated repayments would be circa $1,200 per week. That's roughly an additional $200 per week or $800 per month above your mortgage budget (*7%, 30 year term, P&I - T&Cs apply).

“So although you could qualify for a greater mortgage, it doesn't mean it's going to be genuinely affordable for your circumstances and budget,” stresses Neville.

• If you're on a fixed rate, be informed as to how much your repayments will increase after the renewal date

It’s vital Kiwis with fixed loans coming up for renewal (a ‘refix’) in the next 6-9 months start conversations early to investigate what their repayments are likely to jump to.

For example, for someone with a $500,000 mortgage fixed at 3% and jumping to 7%, their mortgage repayments will jump from circa $2,300 to $3,500 per month (*25 year term, P&I) - that's almost an extra $1,200 per month.

Neville says “Early conversations give homeowners something invaluable, time to review their budget and expenses in detail, and make decisions on whether any lifestyle changes are needed. The aim here is that when the refix date rolls around, you've had time to adjust to your new budget.”

During this time they can also explore if restructuring the existing mortgage and/or a refinance is necessary to help ensure they’re getting the most affordable option possible.

Restructuring involves discussing key areas such as:

• Fixed vs floating rates
• Splitting your total borrowing between loan products
• Offset loans and revolving credit facilities
• The loan term
• Is an Interest only term reasonable?

Refinancing accounted for 40% of The Lending Team’s enquiries last month. Refinancing aims to secure a better interest rate, utilise cash contribution and/or access a more suitable mortgage structure.

• Get specialised advice on your position from a mortgage adviser - early!

Neville says homeowners can spend a lot of time on their own worrying about the ‘what ifs’. “When individuals are unaware of their options, it can be overwhelming for them to make a plan forward,” says Neville.

He stresses this is what mortgage advisers are here for.

“You won't know where you are until you've had an adviser review your position and walk you through your options. From here, you and your adviser can build a plan to tackle your goals.”

Reaching out early is beneficial to explore and discuss each option available, when you’re not under a pressing deadline.

The main theme with these strategies is ‘be proactive and give yourself time to make decisions’. Don't wait until a month before your mortgage will renew or, after you've found your dream home to discuss the mortgage.

“Early discussions are key to ensuring you're informed and have a plan to navigate through the uncertain market,” concludes Neville.

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