What to Do About Rising Mortgage Rates

Your mortgage repayments are about to go up, here’s what you can do about it

Most pundits now predict New Zealand mortgage interest rates will keep rising, before reaching a peak some time in 2023.

The Backdrop

It’s All About Inflation

Right now, New Zealand’s public enemy number one is inflation.

New Zealand’s central bank is responsible for regulating the banks and mortgage lenders such as ANZ and Westpac, but its primary purpose is to keep inflation under control. At present, the central bank is fighting, and possibly losing, a battle against inflation. That means the central bank are forced to keep increasing interest rates – that’s the only real mechanism to fight high inflation.

Read on for a little perspective on the current situation, and for some things you might want to do about it.

The Property Market

In New Zealand, house prices soared by more than 40% from the start of the pandemic to a peak in November last year but have since plunged by more than 10%, with the central bank recently saying a continued decline “remains desirable” for long-term financial stability, Reuters reported.

First home buyers seem active, some over-leveraged investors are selling up, and those simply paying down a mortgage are often locking in better repayments by switching banks.

Anyone with an existing mortgage is wondering if rates will keep rising through 2023, and if so, how much pain there will be ahead.

Given market dynamics, more and more people are looking for professional help in the form of financial advice. We say it's a great time to make sure you make the right decisions during times like this.

Banks are hungry and fighting for new business, offering up to $10,000 for people to switch mortgages between banks.

Against this backdrop, the banks are fighting each other for new business.  Many are promoting one percent cashback offers and by offering this amount of cash to support new customers, it can make refinancing a great option. A one percent cash back offer means some lenders (banks) will pay you one percent of your mortgage to shift it to them, for example: $7,000 in cash for a $700,000 loan.

Keep Perspective

While some readers are facing real financial pressure, a little perspective can go a long way.

If you’re in debt, including with a large mortgage, then inflation might actually be your friend – assuming you can keep paying debt repayments, that is.

Inflation and Debt

When a person or business borrows money, the cash it received now as borrowings will be paid back with cash earned later. A basic rule of inflation is that it causes the value of a currency to decline over time. In other words, cash now is worth more than cash in the future. Therefore, inflation lets debtors (those with mortgages) repay lenders (including banks) back with money worth less than it was when they originally borrowed it.

Another way to think of it, if over several years your income increases at a comparable rate to inflation, then you still owe the same overall amount of money, but now you have more money in your paycheck to pay off the debt. In other words, your income has inflated, but your debt has not.

Of course, inflation also causes higher interest rates, and higher prices, both of which need to be managed before borrowers might feel like they’re making headway.

Hold On

Just like the seasons, the forthcoming ‘winter’ for mortgage interest rates will surely be followed by a ‘spring’ then ‘summer’ when you’ll likely get a reprieve of some kind: perhaps steady pay rises, lower interest rates, or your expenses could drop when a child moves out of home.

Whatever the case, during testing times like now, if you’ve got a clear plan, know what you’re trying to achieve, and simply hold on, you’ll probably end up doing quite well when the financial situation stabilises.

Learn from the best: how billionaires handle bad times

What You Can Do About Rising Mortgage Rates

Exactly what you do at this point will depend on a range of things, mostly centred on where you are now, where you want to be, and what you’re willing to do to get there.

If your finances are already tight, it might be time to check your spending, adjust your budget and expenses where possible.

If you’re a borrower, you’ve got several options:

1. ‍Refinance your mortgage
2. Repay debt – if you can afford to! ‍
3. Restructure or refix your mortgage

Refinance Your Mortgage

Refinancing is the process of transferring your existing home loan from one bank to another. When you refinance, you’re essentially repaying your existing loan, then taking out a new loan at a different bank.

The best time to evaluate the pros and cons of refinancing is towards the end of your current loan’s fixed rate term, otherwise you’ll likely have to pay break fees.

Learn more: refinance your mortgage

Restructure or Refix Your Mortgage

Refix

When any fixed rate mortgage is coming to the end of the fixed rate term, your bank will offer you a new rate. When you refix your mortgage, you can, and should, take advantage of the situation to reduce the rate the bank offers.

Restructure

While your mortgage rate is important, it’s not the only thing to consider. Mortgage restructuring is the process of rearranging your home loan into a winning combination of fixed and floating interest rates, setting the right term or terms for fixed portions of the loan, and ensuring appropriate loan repayment amounts are set. The usual aim of restructuring is to save you thousands in interest repayments and repay your mortgage many years quicker than any standard term given to you by the bank.

Learn more: refix or restructure mortgage

When It Comes to Future Inflation and Interest Rates, Remember: Nobody Knows

There's no guarantee that New Zealand mortgage rates (or inflation) will do what the gurus expect – that is, what is reported in the media – so whatever you do about your personal situation, keep in mind the common response to past disasters and crises has been for central banks to drop interest rates. That means staying flexible could be a sound financial move – no matter how much certainty you crave, it might not feel nice if you locked in what seemed like a great five-year home loan rate at the time, only for a natural disaster to hit the country somewhere and lead to a significant drop in mortgage rates a few months later!  

Of course, the level of flexibility all depends on your individual situation, for instance: a young couple considering making the move to Australia may seek more flexibility than a stability-seeking middle-aged couple with school-age children.

The Bottom Line: What You Can Do About Rising Mortgage Rates

Exactly what to do in the current situation depends on your current circumstances, desired future situation, and attitudes towards the current lending market.

For a complementary initial chat – which could include tailoring your mortgage to your personal financial position and determining whether it’s worth breaking your fixed term and/or shopping around mortgage providers – please get in touch with one of our mortgage advisers (mortgage brokers). With thousands of dollars at stake, what have you got to lose?