Managing interest rate pressures on your mortgage or home loan

Managing interest rate pressures on your mortgage or home loan

 

Ok the OCR has moved for the first time in a long time and interest rates are all rising. Is this a problem? It depends on your perspective.

If you are a homeowner then yes it will have a direct impact, your mortgage payments will rise. Again, is this a problem?

If you bought your home some time ago when rates were higher and you have not borrowed more, it is probably not a problem and you have been enjoying cheaper money than you anticipated. Additionally you have possibly paid back more principal than you normally would have and you are now in a better position.

For the majority this will not be the case, certainly in Auckland if you have bought your first home or upgraded in the last 3-4 years, it will have been because the lower interest rates have assisted you to do this. The low interest rates probably had some impact on the increased house prices too.

What most people are not aware of is where the historical interest rate has been. Before we had 4% & 5% interest rates, the previous 30-year average was about 7.5%. Most approvals for lending in the last few years have been based on a servicing interest rate substantially less than this.

My first mortgage was 12.2% floating and 11.9% fixed, so quite a difference to today, but not that long ago and within the time the Reserve Bank was targeting 3% inflation rates.

What does this all mean?

Raising interest rates will affect people’s disposable incomes, and quite quickly when you look at the average Auckland mortgage. A 1% raise in the interest rate will add a bit over $300 to the typical Auckland monthly mortgage payment and over $600 to a million dollar mortgage.

The Economists are talking about OCR rate move of 2.25% by 2017, or in your terms an increase to about 8%, which is 2% more than the 6% rates we have been enjoying recently. In a day-to-day dollar value, another $600 per month to find for the typical mortgage payment. Ouch!

Back to the point of this post, managing the interest rate pressure on your mortgage.

Step 1. Recognise the pressure is coming, though it is not here yet.

Step 2 Do a budget. If you do not know what you real disposable income is how do you know if this is going to be a problem for you?

Step 3. Seek advice on what you can do.

For many people it will be as simple as a straightforward fixed interest rate plan. Taking into account possible wages raises, additional payments to your home loan and things like expected bonuses and inheritances that will allow you to accelerate or pay off your mortgage quicker. A well though out rate plan can help you reduce debt faster and avoid penalties for paying off fixed rates early.

If you have an investment property, it may mean taking an interest only approach for the rental and focus your principal payments on your own home. This may also be more tax efficient, but you need to talk to an accountant about that.

You may want to look at a more effective approach in the way you are using your credit card to assist with reducing your mortgage. If you are disciplined you could save 6-8 years on your overall mortgage by using the tools you already have better.

If you are one of the people who carry an outstanding balance on your credit card, exploring the low interest rate transfer options might be a way to minimise interest costs until you get things back under control.

Exploring the use of transactional mortgage products, like revolving credit and reducing balance home loans. By using one of these to transact in you make the most of the funds you have to reduce your overall interest bill. If you can take the reducing balance version you should not be any worse off than the typical table mortgage most people have already.

Ok so these things may not be enough if you have to find $600 per month and you just do not have it.

What next?

A serious sit down and look at what you need and do not need in you budget is a start.

If budget is tight and you have already cut things back, then having a look at what you really need in a property is the next step. Yes, this is your family home, but you will survive better financially if you take action before the bank forces you to or you get behind in payments.

What I am suggesting here is reviewing selling your place and buying another property which is more affordable. History has shown taking action early has meant people often get what they want and those that do not, spend a long time getting back to where they were.

If you take action early, before you get into financial difficulty, it is likely your lender will look at you favourably. If you are behind in your payments then you will not get a new mortgage if you try to do this later.

What is the plan I am suggesting, review your size and location needs. Can you get by with a smaller home than you currently have? Can you move to a location that is cheaper to buy a similar sized home, or both? Yes, the kids and their schools will be a consideration as well as travelling time and costs.

Part of the reason for raising this is those places that are affordable now and not too painful to move to, will not be for long. What I am suggesting is the next suburb over where you can buy a house for $300 per month less in mortgage payments is going to be attractive to others who are in a similar position to you. This will push the price up and mean you have to move 2 or 3 suburbs further out to get the same result.

The other factor at work is the travel and commute, what is another $20 in fuel a week and 20 minutes a day when compared to an additional $600 per month in mortgage payments?

As interest rates rise, peoples ability to buy your home closer to the city decline and they will look further out. The equation on the travel will be one they will consider to judge your property against the property they too are looking at in the next suburb.

If this all sounds too hard and complicated or you do want get some advice, get in touch and we will get you talking to the right people to help for your situation.

The information is only intended to be of a general nature and should not be relied upon in any part without obtaining full details of the products and services by contacting Willowgrove Consulting Limited. All product and service details, terms, conditions and other information are subject to change at anytime without notice. Terms, conditions and fees apply to the various products and services and are available on request. A disclosure document will be provided to you on request free of charge.

Jon-Paul Hale

Written by : Jon-Paul Hale

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