Interest rates have risen, and they are all biting. 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 have not borrowed more, it is probably not a problem. You have been enjoying significantly 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 in doing 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 3% & 4% 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.
• Yes, property prices were significantly lower and so was my income.

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. We're also seeing a cost-of-living impact. A 1% raise in the interest rate will add a bit over $700 to the typical Auckland monthly million-dollar mortgage payment.

Ten years ago, we had a similar cycle going on, though without quite the same employment and cost-of-living impacts. The Economists then were talking about an 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 had been enjoying recently.

• In a day-to-day dollar value, that was another $600 to $1,200 per month to find for the typical mortgage payment. Ouch!

Following Covid, we're now seeing the same cycle again, except we're going from 2-3% to 7-8% on much higher mortgage values.

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

Step 1: Recognise the pressure is coming.

Step 2: Do a budget. If you do not know your real disposable income, 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 wage raises, additional payments to your home loan, and things like expected bonuses and inheritances will allow you to accelerate or pay off your mortgage quickly.

• A well-thought-out rate plan can help you reduce debt faster and avoid penalties for paying off fixed rates early.
• If you have an investment property, you may want to take 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 consider a more effective approach to using your credit card to reduce your mortgage. If you are disciplined, you could save 6-8 years on your overall mortgage by better using the tools you already have.
• If you have an outstanding balance on your credit card, exploring 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, you make the most of the funds you have to reduce your overall interest bill.
• If you can take the reduced balance version, you should not be any worse off than the typical table mortgage most people already have.

Ok, so these things may not be enough if you have to find $600-$1,200 per month and you just do not have it.

What next?

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

• If your budget is tight and you have already cut things back, the next step is to look at what you really need in a property.
• 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 that is more affordable.

• History has shown that taking action early has meant people often get what they want, and those who 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 will travelling time and costs.

Part of the reason for raising this is that places that are affordable now and not too painful to move to will not be for long.

• What I am suggesting is that the next suburb over, where you can buy a house for $300 per month less in mortgage payments, will be attractive to others who are in a similar position to you.
• This will push the price up and mean you have to move two or three 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, people's ability to buy a home closer to the city declines, 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 want some advice, get in touch, and we will connect you with the right people to help with your situation.