Rising Interest Rates – What should you do?
After years of low-interest rates in New Zealand, the interest rates have been going up continuously for some time now. In fact, interest rates have been going up in many other countries as well, partly because of the economic measures taken by the central banks during the global pandemic.
Whatever be the cause behind it, we are all faced with the reality of the increasing interest cost and its impact on our household cash flow, especially if we have a big home loan. The impact on our cash flow is further worsened by the overall inflation.
An increasing number of people are finding themselves in a situation where their current fixed rate is expiring which has historically been on the lower interest rates. Now, this requires to be re-fixed at the current fixed rates which are much higher than what they were sitting at previously and in some cases, this could mean a difference in the interest rate of up to 4% per annum. On a mortgage size of let’s say $500,000, this could mean an increased interest cost in the region of $20,000 per annum, which will potentially increase your mortgage repayment by about $400 or more per week. Not everyone is prepared for this kind of increase and has the cash flow to meet this added cost. Most are clearly struggling – some having to go to the extreme measures of considering selling their property which is sad, especially if this is their family home and they will be forced to go back to renting.
There are no easy “one size fits all” solutions to this situation and it requires to be looked at closely, keeping the specific situation of each household in mind. The banks are encouraging people to talk to them if they are finding it difficult, so the banks could look to help them in their situation.
In this situation, it might also pay to speak to your financial advisor, who can look into your individual situation and may potentially give you some sound advice to help you.
Broadly speaking, you might consider exploring the below, noting that the below is only a generic suggestive and not a comprehensive list of ways to deal with this kind of scenario, and does not take into account your specific situation.
- Explore ways to increase your income which might include:
- Starting an after-hours part-time business as per your skill set
- Increase income by renting extra rooms.
- Explore ways to reduce your avoidable expenses, which you have been thinking of reducing for a long time.
- Request your bank to assist review your existing loan terms, which may include tools such as repayment holidays or interest-only payments for a short period etc. However, please note these may only be short-term measures, strictly based and dependent upon your long-term plan. Please note that you may end up paying more interest over the term of the loan and your repayments will increase after the expiry of such short-term relief measures. A careful thorough analysis is needed.
- Talk to your financial adviser. They may be able to assist you reviewing your mortgage terms as above and if it helps you, may assist you with refinancing your home loan, which may benefit you in the following ways:
- Increase your loan term back up to 30 years again to partially offset the impact on repayments due to interest rates increase, noting this is not a preferred option but a last resort tool if cash flow is struggling.
- May potentially be able to achieve lower rates than your existing bank
- Consolidate your other more expensive and/or short-term debts with higher interest/repayments, into your home loan and reduce overall repayments.
- Cash incentive offered by the bank also partially helps with the cash flow.
We acknowledge these may be hard times, but you are not alone – seek help. Speak to professionals.