There is a lot of talk in the press, around the BBQ and dining room table at the moment about market interest rates increasing and what higher interest rates mean for peoples mortgage payments. A lot of this chat leads to some sleepless nights and worry for people who have interest rate refixes rapidly approaching and are worried about the higher interest rates and increase they are likely to experience in their mortgage payments.
Below we have laid out some strategies to help you cope with this financial panic and hopefully leave those sleepless nights behind!
Incomings and Outgoings
When considering higher interest rates and mortgage payments something often avoided but immensely valuable is completing a detailed family budget. The first step to putting your mind at ease is to understand exactly what your income and expenses are, where your cash is allocated and what your surplus income is.
There are a lot of great tools available to you now, you could use the budgeting tool from Sorted.co.nz, the tools at booster and many others even creating your own in excel! The purpose of this exercise is to determine what cash flow you have available to you and where you spend it.
Step one is to determine your weekly or fortnightly income. This should include your salary, rental income, investment income and any other income source.
Step two is determining your expenses. Some of the app’s above will help you accurately pick these up, otherwise some good old doom scrolling on your bank statement feeds will go a long way (whilst likely having you reach for a comforting block of chocolate!). When looking at the expenses try to list them out and get a grip with the frequency of them. Some will be weekly (fuel, groceries etc.) and others fortnightly or monthly (insurances, mortgage payments etc).
Step three is to split these expenses into different buckets for fixed and variable expenses. Fixed expenses are items that don’t change amounts between payments (i.e. your mortgage, internet, insurance, rent etc.) and variable expenses are those that change (food, power and entertainment).
Once you have those bucketed out you want to get them into a budget planner which will take your net income and expenses to figure out what your net cash flow should be. When it is all loaded out you can start working through it to put some plans in place around what expenses can be cut to allow for greater mortgage payments. It might mean fewer lunches out and coffees each week or it could mean budget baked beans for a while but it will give you a better plan. Often people will find they have subscriptions they had forgotten about and it is amazing what you can cut out when you put some focus on it.
This is something you should revisit often to ensure that you are keeping on track and can continue to refine your budget to meet your wants and needs.
Balance Sheet Triage
The next exercise to undertake is a look at your personal statement of position or balance sheet. It is a good time to look at your assets and debts and see if there are some options to cut those debts back.
Steps here are quite easy, firstly identify your assets. You will have your home and likely a car or two (or three). There could also be a boat, caravan and old furniture. There may be shares or other investments as well. Write all these out and list your estimated values against each. Note you want this to include ALL your assets.
Once you have done this go through the list and rank them 1 to 5 with 1 being a must have and 5 being a nice to have. This will help you get some clarity with what you are happy to let go if need be.
Next you need to identify your debts. Split these into two buckets being secured and unsecured.
Secured debts are those that there is an asset used as security (i.e. a home loan or car loan) and unsecured debts are those that aren’t secured by anything (i.e. a credit card or personal loan)
Against each of these line items you want to identify the current balance, payment amount and interest rate. Note, make sure you normalise the payment frequency here so you can compare apples with apples.
Once you have done this you will be able to identify debts that if you can reduce or repay will have a great effect on your budget. Because they hold no security, and therefore recourse, often the unsecured debts will be the more expensive debts.
Once identified the expendable assets and expensive debts you can go about ‘right sizing’ your balance sheet. In short this involves selling down assets to repay debts. This can often have a huge impact on your free cash flow at times freeing up hundreds of dollars a week.
Bring some disciplines into your finances
Spending can be addictive and even a comforting tool or coping mechanism when people are under stress, commonly known as retail therapy. When cash or available credit limits are freely available sticking to a budget can be tough.
There are some methods you can put in place to help manage this and here are our 5 favourite.
- Increase your mortgage payments above their minimum amount. This is a simple thing to do and most banks will allow you to do this through your online banking. The advantage to doing this is that you are putting funds into your mortgage and thus ever reducing your interest bill. You can also find that you may set the new payment at a level that provides some insulation to increases in interest rates. For example, if you have a minimum mortgage payment of $500.00 a month but set it at $1,000.00 then if your interest rate increases your monthly payment isn’t likely to change, just the share of it applied to interest would be greater.
Some banks, like Westpac, also offer a redraw option under their mortgage which means that you can always redraw those funds if an emergency came up. - Reduce your limit on the credit card. High limits on credit cards are common and can trap people into high balances that become unmanageable. Reducing your limit right back will limit what you are able to spend on the credit card forcing greater focus on the spending and the limit.
If you determine that a you need a credit card with a high limit then you can always leave that credit card in a draw at home and get a second with a minimum limit for day to day use. - Set up a savings account at another bank or online provider. There are plenty of new savings providers as well as better returns on bank savings accounts these days. By establishing an account that sits with another bank you can move your savings across to another organisation independent from your normal bank accounts which will make it more difficult to access and plunder in a weak moment.
- Set up a pocket money account. We sometimes see people who have eschewed credit cards and set up pocket money accounts where a pre-determined amount from their regular pay is moved into and that is all they have available to spend between paychecks. The balance of funds is put into savings or their mortgages which isn’t easily accessed. If you can manage the access to funds this is a great method to make you focus on your spending.
- Set yourself a goal to review your spending regularly. One of the most difficult things to do is confront your own finances and, especially as a couple, review these and have an honest conversation around them. Setting a regular review of your spending and tracking against your budget will help you cross this bridge and make sure things never drift too far.
These are good some mechanisms you can use to manage spending. Utilising things like automatic payments for bills and savings will make it much easier to live within your means and control the use of your money.
Consider a refinance, restructure or debt consolidation
When there is a major financial change, like the refixing of a mortgage, in your lift it is always a good time to review your finances and perhaps look at a restructure or refinance. There may even be an opportunity to explore some debt consolidation of your unsecured debts mentioned earlier.
Below are some important items to consider when looking at each.
What to consider for a Refinance
Review your options. It is important to ask your mortgage adviser to review more than one lender when refinancing to ensure that you can secure competitive interest rates or perhaps more flexible terms (interest only) than your current provider.
Different lenders offer different products that could be important to you such as an offset or redraw option on your mortgage. Limiting yourself to one lender may end up with terms or products that aren’t best suited for you.
Negotiate with a lender. Most lenders will anchor their offers close to their advertised rates, however, there is often room to negotiate these and it can be a lucrative exercise to undertake.
At times going into a barter with more than one bank can yield better interest rates, cash back or other bonuses.
Your mortgage adviser will be best placed to do this on your behalf with a strong understanding of what the current lay of the land is.
What to consider for a Restructure
Structures for cash flow relief. There are plenty of options when restructuring your debt to provide some cash flow relief. These include extending the terms of your debt, moving to interest only or even looking at a bank holiday. These, however, can result in you paying more interest long term and may not be the best suited option for you.
Structures for peace of mind. There are also ways you can structure your lending to lessen the burden of rate changes and provide some peace of mind. These include splitting your lending over more than one loan different fixed rates so that it refixes in piecemeal tranches.
It may also include having a revolving credit, offset or redraw facility in place allowing you to aggressively pay down some debt with the option to draw it back out if required. There are, however, some limitations to these.
In all instances the most important thing when considering a restructure is to work with a mortgage adviser who can provide you advice and assistance in determining the best structure for your needs.
What to consider for a debt consolidation
Debt consolidation is a great tool for managing your finance costs and securing some certainty around debt reduction and payments as it can become overwhelming with multiple loans to different providers all being amortised across different payments. Some important considerations are included below;
Credit Cards. Occasionally banks will offer an interest free rate on a credit card for a balance transfer. This is a great option if available and you are looking to stomp out some credit card debt as your rate can drop from up to 22.5% to 0% allowing a much easier amortisation of that debt. As an example, if you had $5,000.00 owning on a credit card at a 22.5% interest rate and you wanted repay that over 12 months you would need to make fortnightly payments of $470.00 whereas if it fell to 0% your payments would fall to $416.00. That is a $54.00 reduction per month or $648 over 12 months!
Consider lenders outside of the banks. There are several lenders that will provide debt consolidation loans that sit outside of the main banks. If you find that you are not able to get bank finance, which may be the case if you are struggling with payments, then considering a non-bank lender is a good option to progress. Whilst they may not be as cheap as a main bank, many are as well or better priced than the debt you are consolidating and can offer some relief on payments occasionally by considering perhaps a longer term.
You don’t need to consolidate all your debt. You aren’t obligated to consolidate all your consumer debt into a single loan, if there are some debts that are on good terms or better pricing you can hold onto these whilst consolidating the other debts. There is no need to cut off your nose to spite your face as it were.
Speak to your mortgage adviser. Mortgage advisers tend to be well versed in a wide variety of debt options and can help arrange the debt consolidation on your behalf. It is always important to get good financial advice before making a borrowing decision and therefore seeking out your mortgage adviser is very helpful.
There are plenty of strategies and options to you to help manage increasing mortgage payments and often it is relatively simple to achieve. It also can’t be understated how important it is to engage with a financial adviser.
As always, reach out if you need any help!
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