How to deal with rising mortgage rates

If you own a home or are planning to buy, you’re probably feeling a bit squeamish with all the news of rising interest rates at the moment.

If you’ve fixed your mortgage, you may be due for a reset – 14% of all fixed mortgages are set to do so between April and June this year, and a further 30% in the second half of 2023. So whether you’re already there, or nervously awaiting the change, know you’re not alone.

Here’s how you can prepare and make a plan to get through.

Gather information about interest rates

It helps to understand why interest rates are rising, and what this might mean for your future.

In saying that, no one knew we’d be here, and no one truly knows what will happen next. Financial mentor Unicia Veer believes we need to be careful not to be too hard on ourselves for a situation outside of our control.

“There’s no point in thinking that you ‘should have known to fix earlier’. Even the experts couldn’t predict how steep the interest rates were going to rise, or for how long. The reality is they may still rise further before they drop again. But history tells us they will drop again.”

Taking practical steps to prepare can help you feel more in control of your situation. You can see the latest rates and easily compare here.

Work out what your mortgage repayments are going to be

The first step once you’ve done a little research is understanding what impact the change will have on you. The earlier you start looking into this, the better.

Unicia suggests getting a good understanding of your current mortgage plan. “Are you on fixed or floating, or fixed and floating? What is the term left on your mortgage? How much are your repayments? Have you been paying more than the minimum up until now?”

Once you know these details, plug them into our mortgage calculator along with current rates to see what your repayments will be. Here’s how rate changes over the past year could have impacted your repayments, depending on the length and size of your mortgage.

Do this at least two months before your mortgage is due for renewal, so you have time to talk to the bank before the pressure is on.

You could even trial putting away what you expect your payments to be a couple of months early. This will give you an idea of how you’ll cope before it’s reality.

Unicia also recommends looking back at recent spending.

“It’s a great exercise to download a couple of months’ worth of bank statements, grab a highlighter, and see where your money is going. Are there any surprises? Are there any quick and easy fixes? Pay particular attention to those non-essential expenses.”

Understanding what your costs are going to look like can help to start getting a plan in place.

Scope out your options for managing higher repayments

Now consider how you’ll manage the higher mortgage payments.

Jonathon bought his first home in 2021 and is preparing to experience higher rates for the first time. He says he and his partner are looking seriously at their expenses to decide what to cut out.

“We’ll have to cut out any discretionary spend and make judgements on which costs can be maintained. It is especially challenging on a single income while raising a new child,” he says.

Get creative here – think about whether you could start meal planning to trim your supermarket spend or cut your clothing budget by buying the kids' clothes second hand.

Jonathon has been putting time into getting a better deal on basics. “Shop around for deals on necessities like electricity and even your bank,” he says. “The squeaky wheel gets the grease.”

Our budgeting tool can help bring together all your spending to work out where you can save.

If trimming your budget isn’t going to cut it, think of ways you could top up your income.

Do you have a skill that could bring in some extra money? Side hustles can help monetise hobbies and lift your income. Other options could be getting a flatmate, selling things you don’t need, or asking for a pay rise.

When ends just won’t meet

If you still don’t think you can meet the higher rates, there are other options available.

Remember your bank wants their customers to stay in their homes (they lose money when their income gets interrupted), so they’ll want to help find a solution. The key is communicating early – don’t wait until you’ve missed a payment to ask for help.

One option is increasing your mortgage term. This spreads payments over a longer period, so your mortgage will cost more overall, but less right now. If you do this, try change it back as soon as possible to avoid paying more in the long run.

You could also ask your bank if you can go interest-only. This means you’ll only pay interest, so you won’t see your principal reducing. It’s important to know that this will only make your mortgage more expensive. So it’s not a viable long-term option, but can help you get through now.

If you’re really struggling, you could apply to defer your mortgage – a short break from payments. This is for extreme cases, and you’ll come out owing more, so make sure you have a plan.

Another possibility is applying for a KiwiSaver hardship withdrawal. Keep in mind that this is a serious decision, so they’ll want to see you’ve taken other steps first.

Remember it's not forever – rates go up and down

It can be stressful and exhausting trying to stretch every dollar, but keep in mind that this is just a season, and it will end.

“It may be 1 or 2 years, but it is not for the full term of your 20–30 year mortgage. It can help us keep perspective and have the ability to keep going while times aren’t the easiest,” shares Unicia.

Amelia bought her home in Palmerston North over ten years ago and says while rising interest rates are not welcome news, she’s learnt to expect the ups and downs and take it as an opportunity to get used to saving more.

“It’s a short-term problem usually. If you can afford repayments at the higher rates, keep your payments at the same level when rates come down. You’ll pay off your mortgage much quicker, and if rates go up again or you find yourself in financial strife in the future, the bank may be more lenient.”

Unicia recommends sharing your situation with loved ones. They’ll be a source of support, and you may even find they’re in the same situation.

“Talk about the struggle with your friends and whānau, so you can support each other. When we share our journey, we can get others on board with our goals,” she says.

You can access help from free financial mentors at MoneyTalks by calling 0800 345 123. For more personalised advice on managing your mortgage, you may want to talk to a financial adviser who specialises in mortgages.