KEY POINTS:
Consumers must be wary of the pitfalls as well as the perks of changing their mortgage contracts as interest rates rise.
With yet another rise in the official cash rate last week, many people are feeling the strain as repayments rise accordingly.
Mike Kingston, Mike Pero mortgage broker
and franchise owner, said high interest rates were "hurting people". His office was receiving three to four inquiries a week from people considering refinancing their mortgage.
Jonathan Symons of ASB bank expected homeowners to feel the impact soon.
"In the second half of this year, people will certainly see some increases when they roll off one rate on to a new one, so we are preparing for that."
Homeowners do have options for taming their rising mortgage beasts, but must carefully consider the pros and cons of each.
Using revolving credit - a floating-rate loan account into which you pay your salary - can be one way to cut the amount of interest you pay.
But experts say there's a huge temptation for householders to continue using the credit rather than pay off the loan.
"You have to stick with the repayment schedule and don't abuse it," said Craig Dealey, general manager of New Zealand Financial Planning.
"As long as you don't see it as free money - because when it comes to credit, there are so many little traps."
He said other tactics, such as taking a three-month mortgage repayment holiday, could add more than three years on to the time it took to repay a loan.
And extending the term of your loan left you saddled with debt for longer and paying significantly more in interest.
Dealey said NZ Financial Planning's main advice to people was to repay debt as quickly as possible. "Unless you have leveraged yourself to the hilt, we generally wouldn't be recommending mortgage holidays or extending terms. You should rather cut your spending elsewhere, and maintain your repayments."
CUTTING YOUR MORTGAGE PAYMENTS
All calculations based on approximate figures of a couple, each earning $50,000, and servicing a mortgage of $200,000.
(1) Revolving Credit:
Pros:
* If couple put $50,000 of their loan on revolving credit, and pay salaries into that account, it would reduce the debt to around $43,000. Interest (at higher floating rate of 10.25 per cent) would be charged on this for as long as their salary remained in that account. Compared with fixing $50,000 at 9 per cent, they could save 6 cents a day.
* Best for people who have lump sums to pay into account and offset interest.
* Also good if they want to increase mortgage payments and pay off faster.
Cons:
* Only works well if all the couple's salary goes in account, and stays there for as long as possible (by paying bills with their credit card).
* Interest much higher than fixed term.
* If account is used to fund the couple's lifestyle, the benefits are wiped out.
(2) Mortgage Repayment Holidays: No payments or interest-only for set period.
Pros:
* Can give temporary relief if couple need cash for something else.
* At lender's discretion; usually only approved in circumstances of hardship.
Cons:
* A three-month repayment holiday would increase loan term by 3.5 years due to interest accrued.
(3) Extending the Term of Loan
Pros:
* Same payment if interest rises.
Cons:
* More paid in interest over a longer period of time.
* Loan terms can only be extended to up to 30 years.
