Many homeowners who need to re-fix their home loans face interest rates twice what they’re used to – and the increased regular payments that come with it.
As an example, if someone had borrowed $400,000, pegged at 2.5% for one year in mid-2021, bi-monthly payments would be around $828. If they set a representative current rate of 5.5% again (without changing the term), the semi-monthly payments would be $1,133, which means they would have to find an additional $305 per fortnight.
Whatever your level of borrowing, we’ve asked the experts for advice on juggling the household budget in what is for many a cost of living crisis.
Revisit the basics
Tim Maurice, head of Auckland Central Budgeting, explains that the first step is to “revisit the basics”.
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“Set a financial goal, set a budget to match the goal, then measure your money against the budget and adjust accordingly.”
He recommends that when money is tight, people should always maintain some sort of emergency fund.
“Make savings of some type a priority because there will be bumps in the road. If you run into trouble, you may even have a savings account with another bank, so it’s hard to access.
He recommends having at least separate accounts, one for regular fixed costs with automatic payments set up, and another for expenses with Eftpos access.
And if an owner’s lower fixed term has not yet expired, he recommends anticipating when it will need to be refixed, to consider “what life will be like” at different interest rates.
“Budget the decisions you would have to make at that time, and maybe make some of those decisions now. I think the technical term is scenario planning.
Maurice says most budgeting departments across the country are completely free, just like the one in Auckland that it represents.
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If you “sink”, take extreme measures
Hannah McQueen, financial adviser, chartered accountant and founder of Enable Me, says the steps homeowners should take depend on the severity of the situation.
“If your situation is falling apart, your response must be more acute.”
Some of the more extreme measures she recommends are:
- Put KiwiSaver on hold;
- Rent a room, “even consider renting your whole house”;
- Check that you are getting the best deals on utilities and lower your expenses here;
- Reduce what you spend on children and limit their activities;
- Postpone larger expenses, such as car replacement or home improvements.
Many people will just have to be more deliberate with their spending, she says.
McQueen says Enable Me clients benefit from external advice and comprehensive planning, which tends to refine savings behaviors and help people focus on growing their income.
“When they can see the reasons why, when they’re excited by the financial freedom that comes with it, they’re capable of disproportionate effort.
“[Otherwise] the problem is that when you’re financially stressed, you don’t see all the options available to you, either because they seem unlikely or because they didn’t even occur to you.
Check the structure of your mortgage
Katrina Shanks, managing director of Financial Advice NZ, said people in difficulty can speak to the mortgage adviser who arranged their loan.
“A mortgage advisor can then make the structure work better for them.
“They may be able to reduce payments if they need to while inflation is high, and change the term for the next two years, and change it again when they have more disposable income.
“They might be able to structure some floating, some fixed and lower their payouts on the fixed, and when inflation changes, invest a bit more in the floating part.”
Shanks says most mortgage advisers are free to the consumer because they are paid by lenders. They are required by law to disclose which lenders they have agreements with and what commissions they receive.
While mortgage advisers often give advice on cutting expenses to help clients get a home loan, many continue to offer help as well.
“In many cases, their relationship extends further, into insurance, other financial needs and goals, more advanced financial planning.
“In many cases, a mortgage adviser is their client’s first foray into financial advice.”
Control your variables: fuel, food and fun
Craig Johnson, mortgage adviser at NZHL, Waitākere, says rate hikes as we see them provide the perfect opportunity for people to take stock.
“The most important thing for me is to dig into the three biggest variables: fuel, food and pleasure. This is where we all tend to overspend. In good times, we spend and we go on. C Now is a good time to build structure around this.
“Allocate an amount for these things once a month, and that’s all you get for that month.”
Johnson, who has been a mortgage adviser for 15 years, says he goes through an expense analysis with all of his clients, who first complete a detailed spreadsheet.
“It’s not up to me to tell people how to spend their money. That’s what you can do yourself.
He says that when people have a plan, they find the motivation to stick to it:
“If they get to the end of the three weeks and they have $200 left (in their discretionary spending amount), that keeps them on track.”
His clients are often focused on paying off their home loans as quickly as possible, and tracking their progress with a company-provided app helps “gamify” the process, Johnson says.