Tips to Reduce Mortgage Stress Amid Rising Interest Rates in New Zealand

Date Published: 4 January 2024

Key Facts

• Mortgage hikes have created financial struggle for many homeowners as 50% of all mortgage-holders have fixed rate periods expiring in 2024.
• There are numerous ways to ease the burden, including refinancing, haggling for better rates, making overpayments, extending the loan term, switching to interest-only payments or considering last-resort strategies like budgeting and downsizing.
• Refinancing, often accompanied by a “cash contribution” from banks to attract new customers, has seen reduced interest rates by 10 or 20 basis points.
• Haggling offers immediate reduced mortgage repayments and is quicker than refinancing, but does not come with a cash contribution.
• Overpaying the mortgage or maintaining the same repayment level when interest rates drop can significantly reduce the principal loan amount.
• Extending the loan term and switching to interest-only payments can lessen the repayment load but increases the total amount of interest paid over the loan’s life.

Article Summary

The surge in mortgage rates throughout 2023, continuing into 2024, has left approximately half of all mortgage-holders grappling with potential financial stress. When fixed-rate periods end in 2024, a significant jump in interest rates is projected. This could hit particularly hard on homeowners who fixed their rates in 2022 when the one-year fixed rates sat at an average of 4.18% and the two-year rates were at 4.75%.

There are several strategies homeowners can adopt to mitigate mortgage repayment struggles. The first strategy involves refinancing existing loans with different banks, as this can provide savings – despite many homeowners choosing to stay with the same bank when their fixed rate period ends. Gareth Veale, a mortgage advisor at EasyStreet mortgages, highlights that the “cash contribution” strategy, where the bank provides new customers cash back once the mortgage is drawn down, can offer significant savings. This strategy was popular in 2023 and is expected to continue in the same vein.

Other approaches include haggling for better rates with the existing bank, overpaying the mortgage, extending the loan term, or switching to interest-only loan payments. However, each of these options comes with its own considerations. For instance, while haggling might yield instant repayment reductions, it does not offer a cash contribution. Overpayments can gradually reduce the principal amount, ultimately decreasing the interest paid over a year. Extending the loan period or switching to interest-only payments can lower repayments, but it may also increase the total amount of interest paid throughout the loan term.

Last-resort strategies could involve budget advice, downsizing, or even renting out spare rooms. As potential options are considered, Gareth Veale recommends a thorough analysis of bank statements to determine if financial struggles are substantial or manageable with effective budgeting.

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