Most homeowners in New Zealand are justifiably concerned about rising interest rates and home loan affordability. In mid-April 2022, the Reserve Bank of New Zealand raised the Official Cash Rate (OCR) to 1.5 percent, its biggest rate hike in more than 20 years. A further increase at the end of May takes the OCR to 2 percent. At the same time, inflation has risen to a whopping 7 per cent, placing enormous pressure on already overstretched household budgets. Restructuring the mortgage could help reduce the risk of exposure to interest rate movements.
Increased mortgage repayments
As the Reserve Bank of New Zealand (RBNZ) battles to contain inflationary pressure by raising the OCR in a bid to slow spending, homeowners across New Zealand face paying thousands more each month for their home loan.
By the RBNZ’s own research, close to half of all borrowers who bought a first home in 2021 will face “serviceability stress” if interest rates increase to 6 per cent. Many of these homeowners, who took on debt at historically low interest rates, will be refixing their mortgage at considerably higher interest rates this year.
The RBNZ is warning that homeowners will need to “sharply reduce their living expenses” to stay on top of mortgage repayments.
Bigger debt commitments
As the cost of housing sky rocketed during and after the COVID-19 pandemic, first home buyers entering the market in 2021 did so at much higher price points with far bigger debt commitments than in previous years.
The average size of a first home buyer's mortgage increased by nearly $95k in July 2021 compared to the same time the previous year, a significant increase in home loan repayments.
Although house prices are expected to soften in 2022, mortgage rates are predicted to keep rising too, eating up any benefit of lower prices by the higher cost of mortgage repayments. There’s no doubt that homeowners – in particular, first home buyers – will begin feeling the pressure of rising interest rates and inflation on their mortgages.
Restructuring the home loan
The way in which your home loan is set up – or structured – can make a big difference to the amount you’re paying in mortgage repayments, as well as the length of time it takes you to repay your home loan in full.
Splitting your home loan, with a bigger portion on a fixed term interest rate and a smaller amount on a variable interest rate, can help reduce the risk of interest rate movements when interest rates are increasing.
At the same time, you still have some flexibility to make extra repayments to the portion of your home loan on a variable interest rate. Essentially, it’s the best of both worlds!
The key to a home loan restructure is finding the right split to suit your lifestyle and budget. And that’s where it pays to work with a mortgage adviser who can help guide you and advise on what could work best for you.
Book your home loan restructure check-in today, by contacting a Mortgage Express branded adviser close to you.