Managing debt

What to do when interest rates go up

5 min read


New Zealand’s economy has seen the longest period of sustained growth since the 1960s, according to comments made by Prime Minister, Bill English. Economic growth is outstripping our neighbours across the Tasman and interest rates on home loans are low. While everything looks rosy right now, for home owners servicing a mortgage, this isn’t a time to be complacent as all indicators point to rate rises sometime in the near future. Here’s our guide to best prepare yourself for when those rates finally do head up.

It’s time to prepare for rising interest rates

According to research conducted recently by BNZ, many New Zealanders (70% of us) are already expecting interest rates to rise this year. However, in spite of this, nearly 7 out of 10 kiwis still aren’t planning on making any changes to their home loans as a result. This suggests that taking a hands off approach to home loans is commonplace right now -- and this isn’t ideal. However, the good news is that it’s never too late to make a few changes that might pay dividends down the line to help cover yourself should rates go up.

Increase repayments to save money

Increasing your repayments is a great way to save money over the long term. For instance, on a $300,000 mortgage with 15 years left, increasing fortnightly mortgage repayments by $100 could lop one year and nine months off that mortgage and save a whopping $15,762 in interest.

Tip: By making the most of the low interest environment we’re in now, it’s possible to free up cash later in life that could be put into interest earning savings instead of paying off debt.

Forewarned is forearmed

Have you done the homework to see how higher interest rates might hit your wallet? It’s worth taking a few minutes to do just this so there are no shocks in the months ahead. Here’s an example: the average mortgage in New Zealand is around $275,000. If interest rates rise by 1% this year to 5.79%, the fortnightly repayments on that mortgage would increase by $71-80. That’s close to $160 every month -- is that an amount you can happily afford? If not, it’s time to look at ways you might have to decrease spending in other areas to make ends meet.

Tip: Use an online calculator to run through some scenarios to see where you might sit should rates go up.

Lock in a good rate while they’re low

If your home loan is currently floating, or if your fixed term loan is coming to the end of its fixed period, it could be worth locking in a good fixed rate while they’re still low. This will give you certainty of payments for one or more years and allow you to save some money in the long run.

Tip: Use an online mortgage calculator to help get an idea of how rates affect your bottom line. All the current interest rates are pre-loaded to give you an ‘at-a-glance’ look at where they all stand right now.

Ways to save money if rates have already gone up

If rates have already started to go up, there are other ways to manage your mortgage that can still save you money. Offsetting, for example.

An offset home loan takes into account all the money sitting in your accounts when calculating your interest payments. If your home loan is $400,000 and you have $50,000 sitting in your various accounts, with an offset loan, you’ll only get charged interest on $350,000. This can potentially save thousands of dollars over time.

Increase repayments and save

Another option is tailored repayments. This lets you make small adjustments to your repayments each year. It can work well if you have a little spare money saved up in need of a home.

In fact, many home loans allow you to make extra payments (up to a point, talk to your bank to find out the limitations) should you find yourself with a little spare cash. The beauty of making extra repayments is that it all comes straight off the principal, which in turn means your interest payments will also reduce, again, saving a lot of money over the course of the home loan.

Tip: Changing from monthly to fortnightly repayments can save you money. This is because paying fortnightly means you’ll make two extra payments every year, simply because there are 26 fortnights (not 24) in a year compared to 12 months.

Hedge your bets

It’s also possible to hedge your bets somewhat by structuring your loan so that a portion is fixed -- to take advantage of a low rate -- and the rest floating. This provides the flexibility to make extra repayments without penalty whenever you’re able, but, at the same time, still enjoying the benefit of low fixed rates and certainty of repayments for a portion of your loan.

Hardship

No bank wants to see a customer unable to make their payments, so if you find yourself in trouble, don’t hide from it, get in touch with your bank sooner rather than later. If the worst happens and you’re unable to make your repayments, your bank may be able to assist with something called a hardship variation -- this is a temporary change to the terms of your loan that aims to see you through the tough times.

No matter what you’d like to do, it’s always a good idea to talk to your bank. They know these things inside out and will be able to make suggestions best suited to your unique situation.