Five savings tricks to soften the mortgage rates blow

ANALYSIS: This time last year, we were seeing the first of many mortgage rate increases for New Zealanders, with the rates jumping in mid-July from 2.19% to 2.5%. A year later, those who locked in for a year - the vast majority of mortgage-holders in New Zealand - will be coming off those one-year rates and facing rates of 5.19% to 5.35%. As a result, many homeowners will need to arrange some belt-tightening measures to manage their budget. Here are five areas that they, and anyone else who is feeling the squeeze, might want to look at first:

1. Groceries

Finding the holes in your bucket should always be the first step when times are tough. Luckily there is plenty of free software such as PocketSmith.com that can categorise your spending for you. In 10-20 minutes, you should be able to see where the majority of your money is going in a given month.

Groceries make up a significant part of any family’s budget, so it makes sense to start here, as higher inflation has hit the weekly shop hard. Look for discounts on your regularly purchased items but consider whether buying in bulk will save you money. Some things, such as laundry powder, are good to buy in larger quantities. Having a lot of laundry powder in your cupboard doesn’t affect how often you wash your clothes. Other items, mainly treats such as desserts, tend to be consumed at twice the rate if twice as much is in the cupboard (in my house anyway!). In this instance, you aren’t saving money; you are consuming more.

Another consideration at the supermarket is whether budget brands could be a good option to reduce your spending. While some budget items have a distinct quality difference that some may not find acceptable, more straightforward items such as pasta and milk can save you a lot of money without sacrificing much in quality.

2. Travel

Once you have your groceries under a tight budget, transport should be the next thing to address. Daily parking costs and, need I say it, petrol are significant expenses that can be reduced by using public transport. As we head into summer, cycling to work reduces costs even more if that is achievable for your personal situation.

The ultimate transport saving is working from home, which would then involve no commuting at all. For example, a commuter who spends $200 per week on petrol, parking and vehicle repairs is effectively getting a $15,000 pre-tax pay rise by working from home (where $15,000 gross income is about $200 per week).

3. Entertainment

Further savings are likely to come from entertainment expenses. These could be takeaway coffees or food, movies or subscriptions to unused digital streaming services. Decide what you can do without and see how much you can save.

MortgageLab founder Rupert Gough: "Finding the holes in your bucket should always be the first step when times are tough." Photo / Fiona Goodall

If you are close to your goal budget, it may be better to reduce entertainment expenses rather than altogether remove all enjoyable activities. For example, rather than going to the movies and having a dinner date every fortnight at the cost of $200, purchase a bottle of wine and watch a Netflix movie at the cost of $30.

4. Can you increase your income?

Employers are screaming out for new staff at the moment, so even a sideways step could increase your income by well over $10,000 per annum. Loyalty to an employer is good, particularly those who have been good to you over the years. Still, at some point, when that loyalty is costing you tens of thousands of dollars per year and putting your family under financial pressure, your situation has to be reassessed.

5. Look at your mortgage

Homeowners can do a lot of financial tricks with mortgage accounts. We have seen some homeowners use parental money and revolving credit accounts to reduce their mortgage payments. For example, parents could lend their kids $200,000 that is held in a revolving credit account. The kids pay the parents 2.5% per annum on this money which reduces mortgage interest costs by almost $6,000 while earning a higher rate than the parents might get on a term deposit. Because the money is in a revolving credit account, the money can be paid back to the parents at short notice. Offset accounts can also work with this strategy, although are not always as good. Note: getting legal advice around this is highly recommended, particularly for the parents.

- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.