More than 40% of mortgage-holders are due to refix their home loan rates in 2024, and the jump in repayments are set to hit finances hard.
Many homeowners are going to be moving from interest rates of around 5% to 7%-plus, but an unlucky few are almost certainly going to see their fixed rates double overnight.
The so-called “mortgage cliff” is already squeezing the household budgets of those who rolled onto higher rates in 2023, and it's likely some homeowners will be unable to cope with the extra financial pressures.
The Reserve Bank has given warning that the Official Cash Rate will be higher for longer, and banks have not been shy in pushing up their own rates.
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CoreLogic chief economist Kelvin Davidson said that the size of the rates jump for homeowners is getting smaller. “Eventually they’ll go to no change at all,” he says.
The problem with the mortgage cliff, or “wave” as Davidson calls it, is that homeowners will have to find the money to make repayments at higher rates for up to a year or more depending on how long they have fixed for.
“It’s a challenge. For a good chunk of people, maybe 50%, are going from 5% to 7%,” he says.
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Mortgage adviser Campbell Hastie, of Hastie Mortgages, says when interest rates started rising in 2021/2022, clients took the rates jump in their stride, and cut back on discretionary spending. “Twelve months ago, people just sucked it up,” he says. People trimmed a bit of discretionary spend when rates rose from 4.5-5% but it didn’t really hurt. “They just carried on.”
The current round of interest rate rises are a shock because clients got used to a certain way of living.
CoreLogic chief economist Kelvin Davidson says the rates jump is getting smaller. Photo / Peter Meecham
“People have been hearing about this crunch for a while now. The interest rate rises, the cost of everything going up, broccolis at 10 bucks a head, all that sort of stuff," says Hastie, adding that mortgage-holders will have to take more drastic action to survive. "This time it’s actually going to hurt.”
Here then are some survival tips for homeowners set to refix:
1. Know your cash flow
“It starts with understanding your [financial] behaviour,” says Hastie. The only way to do that is to actually go through your bank statements line by line and put income and spending into categories.
Many mortgage-holders, however, don’t know how much they are spending and how healthy their cash flow is, which is an issue.
“We get to six months of their bank statements, and categorise [the spending]. We literally put it back to people and say, ‘This is what you are actually doing. Here’s your food, the grocery bill, what you spend on petrol, and all the different things’.”
2. Cut back on expenses
Hastie doesn’t enjoy asking people what their priorities are, but has to if they are going to survive. “We ask, ‘what would you trim if push came to shove? What would you trim if it comes down to a choice between going out for dinner and paying the mortgage?'
“A couple of clients have said that felt like a kick in the guts.”
Hastie has definitely seen a reduction in spending on house improvements. “Maybe we see a number of transactions at Bunnings [Warehouse], and they’ll agree to pull that," he says.
“I try to be gentle. I don’t just sort of smack them with it, although that is what I’m doing. It gives people the ability to say, ‘Well, here are some levers to pull to get what I want’. If you think about it like that, people tend not to be [annoyed]. They take it as a serious reality check.”
Re-prioritising your budget, and cutting back on unnecessary spending, can prepare you for a more expensive home loan. Photo / Getty Images
Hastie doesn’t moralise, he just gives clients options. “I don't care what people spend their money on. That’s your money. You spend it how you like. But just understand that it has consequences and this opportunity cost.”
3. Boost your income
Clients can also look to boost their income. For some people that might mean getting a pay rise. But there are other ways, such as side hustles, or a partner going back to work.
4. Seek help
Anyone who is waking up at night fearing how they will pay the mortgage should seek help, says Hastie.
“We have had [clients] who have been really fretting about it because they’ve difficulty getting to grips with the reality check. They’ve read about it. And they understand it. But when it comes to the crunch, they’ve just gone, ‘oh, my God, this is real. It’s not just something I read about in the paper. This is actually real’.”
Mortgage advisers are a good place to start for advice. They can also seek specialist budgeting advice. Mortgage advisers can help clients structure their mortgages, and to shop around to get better mortgage deals when they are due to refix.
As well as talking to advisers, mortgage-holders who are struggling financially should contact their bank, MoneyTalks NZ, or charities such as CAP Debt Help, or Good Shepherd NZ.
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