Five things you can do if you’re worried about rising interest rates
You don’t have to look far yet to find stories of recent first-time homebuyers with serious financial worries.
On Reddit over the weekend, a buyer who bought in 2021 said he was worried about what might happen to his $1.4 million home loan. Even though they had a household income of $250,000, the prospect of seeing their 3.45% interest rate turn into 7% or more was frightening.
” To my knowledge, [I] am unable to sell without having to pay the bank again,” the person wrote.
“Whereas [I] I know I am in a privileged position, this has a huge impact on my mental health, especially seeing other FHB colleagues and close friends applauding the fall in property prices. Obviously, FOMO and bearing the consequences, it looks like a weekly drop of bad news on bad news.
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If you’re in a similar situation and wondering how to get out of it, there are a few things you can do.
Determine what your refunds are likely to be
Mortgage adviser Glen McLeod says there’s no magic bullet, so the first thing most people need to do is figure out what their repayments will rise to when they’re fixed, and how their family budgets could be modified to deal with it.
“At the end of the day, I think we’re going to see a lot of that over the next two years – it’s only going to get worse before it gets better.”
Your bank’s website will give you an idea of current rates, and you can use a home loan calculator to determine your repayment amount.
From there, you can see if there are enough changes you can make to your current expenses to make them affordable.
“Maybe you’re not doing that Bali vacation or whatever this year, maybe it has to be in Whitianga,” McLeod said.
“Do you need to buy that cheese at $30 a block? Everyone needs to watch this stuff now – even filling up your car now is so expensive, it’s all over the place. But as long as you can make it work, it’s only for a moment, it will go up but then it will come down.
Increase your income
If things are really tight, you may need to research how you can increase your income.
This may mean pressuring your boss for a raise (apologizing to the Reserve Bank), moving to a better-paying job, or a part-time weekend job.
Stuff reported last week that a borrower who worried about rising interest rates at the same time his home’s value fell had taken on a second job to help cover the costs. You can also take on a roommate or boarder to help you out.
Restructure your loan
Katrina Shanks, managing director of Financial Advice NZ, said you might be able to get some relief by changing the terms of your mortgage.
If you’ve had a loan for a while, or took it out for a shorter term, you may be able to reduce your repayments by restructuring it to be repaid over 30 years.
A loan of $500,000 at a rate of 6% works out to $1,383 per fortnight over 30 years, compared to $1,486 over 25 years.
Some people took the opportunity to pay more than the minimum on their home loans when interest rates were low. If this was the case for you, it gives you more flexibility to negotiate lower refunds when you come to refix.
Shanks said another option could be to ask your bank to make your home loan “interest-only” for a period of time.
This means that you only pay the interest on the debt, you do not reduce the principal due. A $500,000 interest-only loan would cost $577 per week at 6%, compared to $691 per week in principal and interest over 30 years.
Take mortgage leave
In extreme cases, you could apply for a mortgage holiday. You can do this by notifying your bank that you are having difficulty and following their process for applying for the vacation.
This gives you a break from your payments for a short period of time. But interest is still charged, so you’ll come out of the vacation with more money. You will need a plan to deal with it.
Shanks said it was important not to panic. “Remember to speak to your lender before you start missing payments – there is almost always a solution, you need to speak to experts such as financial advisers to help you.”