Nick Stewart: Stay vigilant as interest rates rise

As interest rates rise and your mortgage costs more don't be afraid to ask for help. Photo / Supplied

OPINION:

In a move that shouldn’t shock anyone, the RBNZ recently hiked the official cash rate (OCR) up by another 75 basis points to 4.25 per cent. This is another record-breaking number; we haven’t seen the OCR this high since December 2008. Yep, 2008 – remember what was happening back then?

As you might expect following the announcement of the highest OCR in almost 14 years to the day, banks are now raising their interest rates again. Debt is getting expensive, with ANZ and Westpac both announcing new floating mortgage rates from mid-December... and that’s without the entire +75bps passed on to customers. ANZ is passing on +65bps, raising their floating rate from 7.34% to 7.99%. Westpac is passing on +64 to take them from 7.35% to also 7.99%

What this means is that some people who managed to nab a long-term fixed rate before the recent spate of hikes, will now be getting letters in the mail with a 7 attached to them. Those who went for shorter or floating rates will already be familiar with the pain, but for some it will be a nasty blow – especially if they’ve been keeping their heads in the sand, trying not to think about it.

Another consequence of higher interest rates is that people will be getting pushed beyond what they were stress tested for by the banks.

Let’s break it down quickly. Say you had an $800k, 30-year loan term mortgage. You paid 10% deposit and you signed on for a 3.86% fixed 3-year rate back in 2019.

Your monthly payment would have been $3380. The same loan at 7.99% has a monthly repayment of $5,279. That is a $1,899 difference – not easy for anyone to stump up currently, especially if you have a family to support at the same time.

People have been hurting as a result of the cost of living for a while now. If you’re now required to scrounge up potentially thousands more per month... that’s scary.

Of course we can’t assume the fixed rates will be the same as the floating rates Westpac and ANZ have announced. At the time of publishing, the floating rates are all that have been announced. It’s likely that the fixed rates may be slightly lower – but also likely that they will still have a 7 in front of them.

The key thing here is to stay aware of what’s going on. I often counsel people not to get caught up in the headlines and panic; that still applies here, but you also don’t want to go too far the other way and end up with a nasty surprise.

Nick Stewart. Photo / Supplied

We’ve seen data this year indicating that there is an increased risk of mortgage defaults in New Zealand, as a result of worsening housing affordability. Mortgages are eating up more of people’s household income, and bills are piling up elsewhere too.

If you feel the wheels coming off, contact your bank as soon as you can and see what options you have available to you. You may be able to negotiate or defer payments to weather the storm. Remember, banks need you to be able to pay back your loan in order for them to make money. It’s worth asking the question – what can I do about this before it gets worse?

Along a similar vein, if you’re struggling with allocating money on increasingly tight resources, there are budget advisory services you can use to help keep you on track. Sorted.org has a free budgeting tool. Booster (a KiwiSaver scheme) has its free mybudgetpal app.

Or if you need someone to talk directly, you can access free, confidential services via MoneyTalks. However you do it, make a plan. Soldiering on in silence is not going to help if you are up to your neck and walking further into the deep end.

In my capacity as a financial adviser, I often talk about staying in your seat when things get rough. This is the case for investments and for KiwiSaver, because this is long-term thinking to make sure the future you is going to be set up for a comfortable life. It also requires a transparent, realistic understanding of your situation. In terms of debt – stand up and seek help before you really need it. Inaction is not going to work out if you’re already struggling. A burden shared is a burden halved.

· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke’s Bay-based CEFEX certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver solutions.

· The information provided, or any opinions expressed in this show, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz