Are you prepared for an increase in interest rates? A recent survey by a New Zealand bank found that 20 percent of homeowners are likely to extend the term of their mortgage to cover a rates rise, and while most people could handle an $80 increase in repayments per fortnight, anything over $120 would be harder to cover.
Interest rates remain low, but could begin rising later this year. While there is time homeowners should take a closer look at their mortgage repayments to work out how much than can absorb when interest rates start to rise.
The same survey found that alongside extending their mortgage, 35 per cent of people would fund higher interest from their savings, including retirement savings.
While these seem like easy fixes, these small ‘tweaks’ can have long term impacts on your mortgage.
Extending your mortgage isn’t as easy as you think
Banks will likely grill your budget and financial position before approving an extension on your loan term to reduce payments. Alternatively people may look to re-finance with a new bank on a maximum term to ease the repayment pressure of higher interest rates. If you do consider re-financing, make sure you talk to a mortgage adviser and put a long term plan in place. If you are a young family on one income it’s ok to tread water for a while until you have two incomes coming in.
Dipping into the nest egg
If you do have savings to call on, the chances are you already have a good budget in place and are financially disciplined. If you are looking to use your savings, we advise reviewing your budget to see what reductions in spending you can make to avoid dipping into your nest egg. It’s also a good idea to make sure your savings are offsetting mortgage interest, if possible.
Do you have a budget?
Many people don’t know what they spend their money on, and don’t have a basic budget. If this is the case, look at your spending over a three month period to work out what’s coming in, and what’s going out.
The good news is you may not have to give up on all of life’s luxuries (ie coffee!), if you can be more sensible about how often you eat out, or limit buying non-essential items. Try to avoid cancelling personal insurances, and always seek advice from an adviser first as you could decrease your cover instead of cancelling altogether.
Long and short-term solutions
If you are left facing a rates rise with little spare cash to fund it, a short-term fix is to look at the cause of the shortage and work out a solution from there.
If you are already budget conscious then it may mean looking at a loan restructure. For tighter budgets, a short term ‘interest only’ loan, or seeking additional ways to boost your income could be an option. Another is to spread your loans across various rate periods to cushion future rises.
When first taking out a mortgage, we also advise clients to budget for loan repayments at a higher rate than the market is currently offering - ie 7 to 7.5%. This helps ensure that you can handle an increase further down the track especially when rates are low.
A trusted mortgage adviser will be able to work alongside you and your budget, to help you prepare for an increase in interest rates and pay down your loan faster.
Contact us to discuss your options.