Finance experts have warned that rising interest rates could add an extra $1300 a month to many Kiwi mortgage bills.
Jose George, general manager at finance experts Canstar, said that research by the company showed peril some homeowners faced as a result of rate rises and cost of living pressures.
“Around 50% of mortgage holders are due to roll off fixed rates this year and the financial shock for them will be significant,” he told OneRoof.
“The blow will be harshest for those who bought at the top of the market and took on home loans at historically low interest rates.”
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Canstar looked at the impact of interest rate rises on a 80% loan with a 25-year term, on a property bought for $1.2 million – a sum that’s in line with what many first home buyers have paid for homes in Auckland, Tauranga and Wellington over the past 12 months.
“Home rates are tracking up and fast. Average households on one-, two- or five-year fixed rates [coming up for renewal] face increases of between $900 and $1300 a month.”
In addition, rising inflation would cut into many Kiwis’ ability to find extra funds to service their mortgage.
“The Government’s temporary relief measure on fuel taxes will help many struggling with household bills, but it’s impossible to know how long the global turmoil will affect prices across many essential goods,” George told OneRoof.
Homeowners who stay on top of their mortgage could save tens of thousands of dollars over the life of the loan by making small changes, George said.
He urged homeowners to start by speaking with their mortgage advisor or bank and ask if they’ll offer a discount. “In some cases, particularly if you are a longstanding customer, this very simple step could result in a cheaper rate being offered,” George said.
Houses in Wellington. Many new homeowners will have bought at the height of the market. Photo / Getty Images
Some mortgage holder may find their bank has some leeway to keep customers who would otherwise jump ship to a competitor.
Mortgage broker Geoff Bawden, from Bawden Consulting, said customers should challenge banks on the interest rates they are offering but should be realistic about how much of a discount they can get. “That’s where advice from an independent mortgage adviser comes in,” he said.
“Advisers know what rates are out there from a variety of lenders and they will know if the rate you have been offered is a sharp rate.”
Even a small fraction off the rate can make an enormous difference over a 25- or 30-year term.
George and Bawden offered six more financial tips that could help struggling homeowners:
1. CLAIM YOUR EQUITY BENEFITS
If you've built up equity, ask for a discount, said George. With house prices rising people who borrowed on a 20% deposit may now own 30% of the property. This makes them more “bankable” thanks to being less of a risk to the bank should house prices crash.
The latest council valuations in Auckland would give owners in the city an indication of how much equity they now had, George said. “We crunched the data and found a $480 saving per month - calculated on average market rates for our example $1.2m property - for those who had an 80% loan, compared to those with 90%. Savings could be even greater if your loan sits at, say, 60%. Talk to your home loan provider and make the case that you deserve a discount.”
The view towards Auckland CBD. The city's new CVs could help homeowners re-evaluate the value of their property. Photo / Ted Baghurst
Bawden said some banks charged a higher interest rate for borrowing over 80% and owners who bought with low equity are best place to save in this scenario.
2. DON'T BE A ROLLOVER
Banks make money out of lazy customers and homeowners shouldn’t let their loan automatically roll from a fixed rate to a higher floating one.
“Be aware of timings and reach out to your provider before your fixed rate comes to an end. Some banks allow a new rate to be locked in weeks prior, which can make a significant difference in a market such as this one," George said.
“Our research showed that rolling over from an average one-year rate to an average floating rate would cost an extra $477 a month, on our example property.”
3. DOUBLE UP, DOUBLE DOWN
A common, but smart way to pay the mortgage faster and save money in the long run is to split the monthly payment in two and pay fortnightly, instead, George said. “A little trick of the calendar [is] there are more than four weeks in a month, [which] means you end up paying more, and probably won't even notice. This little tweak can save nearly $7000 in interest payments on our example mortgage,” he said.
Make sure you tell your lender you want to halve your monthly payments, not simply go onto a fortnightly rate, which doesn’t save you anything, Bawden added.
4. FIND A LITTLE EXTRA
Regular overpayments on a mortgage may eat into the family budget in the short term but save a lot over the life of the mortgage. “It’s the old classic of simply paying a little more,” George said. “Skip one fancy dinner over the month and you’ll save more than $20,000 over the term of the loan.”
Homeowners should make sure their mortgages are structured to allow overpayments, which avoids any penalties. Often that means having a portion of the mortgage on a floating interest rate. Some flexible home loans accept overpayments. Another option is a revolving credit portion of the mortgage. Because revolving credit is usually at the floating rate make sure the portion is small, Bawden said.
5. BE A RATE TART
Homeowners sometimes save money by switching banks to get a better rate. Most banks require a registered valuation report for this, which can cost around $1000, so it doesn’t always pay off. “If you are with one bank and see another offering a better deal, go back to your bank and squeeze the rate you are paying," Bawden said, adding that most people who switch typically have other reasons, such as the bank refusing to extend the mortgage to pay for renovations. “Often it’s because the current bank won’t do something, or the process is a bit onerous.”
6. GET IN EARLY
Bawden said he had been taking advantage of the ability to re-fix client’s mortgages six weeks early. With the risk of rates going up this year, homeowners should consider doing this as they near the end of fixed rate periods. “With all the volatility after New Year we were moving [to refix] clients as early as possible to get lower rates while they were still available,” he said.
George recommended doing all of the above to get ahead of the household budget crunch. “A few minutes of research and a call to your home loan provider could work wonders for your financial future,” he said.
