Homeowners in New Zealand are being warned to prepare for more interest rate shocks, as the Reserve Bank of New Zealand lifts the OCR to get the high cost of living under control, and lenders follow with interest rate hikes. For borrowers who are concerned about the prospect of higher mortgage repayments, splitting their home loan could help spread their risk. Here are some guidelines on what to consider when deciding how best to split your mortgage.

Global uncertainty and high inflation

Earlier in October 2022, the latest consumer price index was released, coming in well above expectations at 7.2 per cent in the three months to the end of September 2022.

The ongoing high rate of inflation has prompted some economists to revise interest rate forecasts, with some now predicting the Reserve Bank will lift the official cash rate (OCR) a further 75 basis points to 4.25 per cent in the next month. For some homeowners that could mean higher interest rates on the horizon.  

While some homeowners may be weighing up breaking existing fixed rates early and re-fixing at a higher rate to get ahead of further increases later this year, others are discovering falling property values have reduced their equity, which could mean they face a low equity premium as well as higher interest rates.

Homeowners who find themselves in this situation should reach out to their mortgage adviser as soon as possible to find out if a solution is available that doesn’t require being penalized with a low equity premium.

Spreading the risk over various loan terms

Deciding how much of the home loan to split or which loan terms to fix at will largely depend on your individual financial situation and affordability. The best way to determine that is to meet with a mortgage adviser to discuss your current circumstances with a view to any future changes that could impact your financial situation.

Things like a new baby on the way, a change to your living arrangements such as getting married or divorced, changing jobs or getting a promotion which would mean an increase in your earnings, are all factors to consider. 

Splitting your home loan and spreading your risk over a number of loan terms could help minimize the risk of higher mortgage repayments as interest rates continue to rise. At the same time, it’s important not to lock yourself into too long a loan term and potentially miss out on an interest rate downturn.

By scrutinizing your current situation and understanding what’s on the horizon, both short-term and long-term, a mortgage adviser can help you determine your ability to afford the repayments on your home loan for the coming two to three years. That could help you decide which loan term would best fit your situation.  

The fact is, there is no absolute right formula when it comes to splitting the home loan or choosing various loan terms, and what’s right for you isn’t necessarily right for another homeowner. And until the Reserve Bank has inflation under control, we may see further interest rate increases over the coming 12 to 18 months, which is why homeowners need to prepare for higher mortgage costs.

Contact a Mortgage Express branded mortgage adviser today to book a review of your mortgage that could help you determine the right home loan split and loan term to fit your circumstances.