It’s no secret that inflation is rising. In fact, New Zealand’s increasing cost of living is making life much tighter for many Kiwis. The price of petrol and groceries are near their highest on record, while many service providers are increasing prices to combat their own rising costs.
As inflation increases, interest rates are expected to follow suit. In early April the OCR jumped 50 basis points, and at the time of writing at least one bank had responded by increasing their interest rates. As rates increase, the cost of mortgages will increase too, adding more pressure to already-stretched households.
For example, if your current mortgage is $700,000 on an interest rate of 4% and you are making principal and interest repayments on a 30-year loan term, your monthly repayments would be around $3,408 per month. If interest rates increase over the next two years by 2%, your mortgage repayments would increase to $4,197 per month. That’s an extra $789 a month you’ll need to find.
If that change was to happen tomorrow, could you afford it?
If the answer is ‘no’, now is the time to get some advice.
How to cut costs to pay for the essentials
When we think about saving money, it’s easy to consider the usual suspects: spend less at the supermarket, walk instead of drive, and don’t buy takeaways. But saving money doesn’t always have to involve cutting down on your spending habits. You can actually save a lot by taking a step back and reviewing your insurances and liabilities.
Do you have a credit card, store card, or car finance loan that’s costing you much more than it should? Have you reviewed your insurances recently to ensure you’re getting the best deal from your current provider? Are your home loan terms and structure right for you?
The benefit of condensing everything is that it means you’ll only have one loan payment instead of multiple payments to many providers. If you’ve added them all to your home loan, you can also stretch the loan term out to reduce the repayment amount.
Mortgage interest rates can fluctuate but will always remain much lower than consumer debt eg: Visa is usually around 20% and car loans are often around 10-12% whereas a home loan is currently around 5% at present.
Make your mortgage work for you, not you for it
As the cost of living continues to increase, now is a great time to get in touch with your mortgage advisor and tweak the way your mortgage is set up. Here at Threefold, we specialise in structuring mortgages and working with our clients to save on interest costs, create a certainty of repayments for the long term, and free up some hard-earned cash to help get through these uncertain times.
Maybe it’s a temporary measure, or maybe you’ll need help in the longer term. Having an open and honest chat with your mortgage advisor will help your finances stretch further and work harder.
7 ways to reduce your household costs by restructuring your mortgage
For anyone who owns a property, mortgage repayments are probably their biggest monthly expense. Here are seven strategies that could give you more certainty and help reduce your overall household costs.
- Fix your mortgage for a longer term.
Floating rates mean you can take advantage of dropping interest rates as they happen – but when they rise, your payments do too. Fixing your mortgage might mean you have a slightly higher interest rate, but it’s guaranteed not to change for that term. For example, a three-year term will give you certainty about your repayments for the next three years, and help you budget for that three year period.
- Consolidate existing consumer debt.
Debt on credit cards, store cards, or car finance loans often have high interest rates and short repayment terms. By consolidating these onto your mortgage, you could save hundreds – even thousands – of dollars every year. For example, if you have a $20,000 car finance loan on an interest rate of 12.95% for five years, this will likely cost you around $455 per month in repayments. By consolidating this loan onto your mortgage for the same loan term but on an interest rate of 3.99%, it will only cost you $368 per month, saving you over $1,000 a year. You could also consolidate the debt onto your mortgage for a much longer loan term which would further reduce monthly finance costs. For example, if you paid that $20,000 off over 30 years, your payments would only be $93 per month (however, ideally you should pay off consumer debt faster).
- Putting rental property mortgage repayments on interest-only.
This means you’ll only pay the interest on the home loan, not the principal as well, which can significantly reduce your repayment amounts. For example, if your current mortgage is $500,000 on an interest rate of 3.99% and you are making principal and interest repayments on a 30-year loan term, your monthly repayments would be around $2,350. If you were to switch repayments to interest-only for a maximum term of five years, your mortgage repayments would reduce to $1,660 per month, saving you over $690 each month.
- Look at extending your loan term.
If you have previously paid higher than the minimum repayments, you may be eligible to extend your loan term which will reduce your monthly payment amounts. For example, if you had a loan of $500,000 at 3.99% over 16 remaining years, your payments would be $3,379 per month. If you extended the term to 20 years, this would drop to $3,093 a month. 25 years would get you down to $2,703, while 30 years would be $2,384. It would take you longer to pay off overall, however it could be the breathing room you need during these uncertain times.
- Refinancing your existing mortgage to another bank.
By switching banks, you can often negotiate lower interest rates and receive a cash incentive for moving your mortgage to that bank. Use that cash incentive to pay off more debt, boost your savings, or treat yourself.
- Revolving credit.
Many people have savings in an account and a mortgage. If you put this cash into a revolving credit or offset account linked to your mortgage, you can avoid paying interest on that portion of the loan. Because you’re likely paying circa 4% on your loan but only getting 1.5% (minus tax) on your term deposit, the savings here are significant. For example, if you had $50,000 cash in a savings account and put that into the mortgage saving 4% over a 25-year loan term, the principal and interest cashflow benefit would be $330 a month.
- Use your mortgage advisor to haggle the best rates or loan structure.
Working with a mortgage advisor like Threefold saves you the hassle of going to the bank yourself. We know what the going rates are and how to squeeze the best deal out of the bank for you, which means the process is much easier and stress-free than trying to navigate it yourself. We can also provide personal advice about some of the methods above to save you money.
The rising cost of living is a serious cause for concern for many New Zealand households, and unfortunately the situation is likely to continue getting harder. Fortunately, there are many ways to reduce your spending, starting with your mortgage.To find out how you could make your mortgage work better for you during these uncertain times, contact Threefold on (09) 418 0773 or request your free consultation below!