Managing Your Mortgage: Getting ahead in a time of rising interest rates and high inflation

Following the recent announcement that the Official Cash Rate has increased from 4.25% to 4.75%, banks are expected to adjust their rates accordingly. New Zealanders are starting to feel the pinch of inflation as their mortgage repayments increase as a result.

The official cash rate (OCR) determines the cost that banks can borrow money at, therefore influencing the rate at which they can lend. Mortgage interest rates usually sit around 2% higher than the OCR itself. The main reason the OCR has been raised is to combat the effects of inflation.

Inflation essentially means that money is losing its value. During the Covid Pandemic, the Reserve Bank of New Zealand dropped the OCR to a record low of 0.25% to funnel more money into the economy. However, now there is an imbalance between supply and demand, we have too much money and not enough resources to provide the goods and services to keep up.

Adjusting the OCR in response to inflation discourages consumer spending and allows the supply to catch back up with the demand. Eventually, businesses will become more competitive and prices will start to drop again. This begins to level out the rate of inflation and eventually the OCR will follow.

So, what can you do to minimise the pinch of increased interest rates?

Shop Around

It is important to remember that even though interest rates are increasing, the banks are still competing for your business. Banks will have different deals or incentives to draw you in. Keep an eye out for these deals as they can play an important part in structuring your mortgage so that you can achieve the best rates for your situation.

When it comes time to refix your mortgage, make sure you are putting in your research and talking to a mortgage adviser. They can help you to understand your situation and implement the correct solutions that will help you to meet your repayments and maximise your savings as much as possible.

However, it is important to note that the cheapest rates don’t always equal the best rates in the long run. Currently, the OCR is not expected to peak until later in the year, meaning we may not see a decrease until late in 2024. Meaning, if you lock in your mortgage at a lower rate for 12 months now, you could come off that term and face rates that are exponentially higher. Although it is impossible to predict what the market could look like this time next year, there are ways of structuring your mortgage so that higher rates don’t hit you all at once.

Split and Strategise

Imagine taking your entire mortgage to the casino and betting it all on red or black. You wouldn’t. Instead, you would think about your strategy split your bets across the wheel. A similar principle applies to your mortgage; by splitting your mortgage across various terms and interest rates, you hedge your bets more strategically and provide yourself with more financial certainty. This means that when one term ends you aren’t faced with paying newer (and likely higher) rates on the full amount.

So, this means that while a 12-month fixed term on a lower interest rate might look attractive right now, it may be smarter to only fix a portion of your loan on the lower rate and the rest on a higher-interest, longer-term to save you more in the long run.

Evaluate Your Income and Expenses

It’s not something you’ll want to do, but it becomes a necessity every once in a while. Taking a deep dive into your bank statements, while confronting, is the best way to figure out where your money is being spent, and where it shouldn’t.

Take note of how you consume what you’re paying for. How many Netflix shows do you really watch? Are you spending enough time at the gym to warrant that membership? Or how often are you ordering from the Uber Eats app when you have food at home? These small amounts will start to accumulate. Currently, a premium Netflix subscription (with no extra household members) costs $300 a year. While this may be worth it for some, for others, this may be a complete waste of money. By cancelling this, it becomes an effective way to free up some extra cash on a monthly basis.

Importantly, this allows you to save more too. When small amounts are constantly drip-feeding out of our account, it’s hard to build up savings. But, after reviewing your outgoings and cutting back on what you don’t need, you might find that your savings start to increase a little more. It’s satisfying to see your money going towards something more meaningful in the long run, rather than dwindling away on all of those monthly streaming subscriptions.

There may also be ways to booster your income. This could be done by getting an extra flatmate, boarder, or international student in to provide a little more cover to your mortgage repayments. Alternatively, maybe it’s time to build or revive a side hustle by getting creative with your spare time. Keep an eye out for gaps in the market where you can provide a solution, you never know what it could evolve into further down the line.

Debt Consolidation

Consolidating your personal debt(s) into your mortgage can help you to achieve lower interest rates over a longer period of time. It can also simplify all of your debt as it is now in one place under one repayment. By consolidating your debt, it also relieves you of any pressures that other personal loans may have put on you, such as missing payments, late fees, or debt collectors. Ensuring that you have enough equity built up in your home to cover the loans is essential as this means you will lose equity in your home and all to your repayments. While this may not be effective for everyone, if it is right for you, your debts should become more manageable.

Final Resort Options

If you find that you are struggling to meet your repayments, there are options available to you. The sooner you get in front of someone, the better. A mortgage adviser can speak to the bank on your behalf, and while most of these options are usually only recommended as a last resort, they still remain an option. This could include; mortgage holidays, interest-only repayments, loan term extensions, or a serious financial hardship KiwiSaver withdrawal. Don’t bury your head in the sand when you start to notice these issues arising. Getting on top of the situation as soon as possible is of the essence. Taking that first step by discussing your situation with a mortgage adviser and finding the best solutions before it’s too late could save you a lot of pain and stress in the future.

Now is a better time than ever to get in touch with your Lifetime mortgage adviser to discuss your next steps in tailoring your mortgage to you.

Click here to book an obligation-free chat with one of our financial advisers.

Article by James Lowes

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.