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Interest rate rises will squeeze some household budgets

Posted to Financial Capability on 13-03-2014

Kiwis are being urged to take another look at their household budgets, following the Reserve Bank’s announcement today that the Official Cash Rate (OCR) will rise to 2.75 percent.

‘The increase in the OCR means mortgage and savings interest rates are likely to rise,’ said David Kneebone, Executive Director of the Commission for Financial Literacy and Retirement Income.

‘Current and potential mortgage holders may need to review their budgets and start preparing for higher interest rates now, particularly in light of the Reserve Bank predicting further rises for later this year.

‘Because mortgages involve repaying a lot of money over a lot of time, even slight increases in mortgage rates can add up to tens of thousands of dollars in the long haul,’ said Mr Kneebone.

According to Sorted’s mortgage repayment calculator, even an increase of 0.25% in interest rates can affect a household’s budget, especially if things are already tight. For a $500,000 mortgage over 20 years, an increase from 5.75% to 6% will increase repayments by $33 a fortnight.

‘However, an increase in the interest rate will be good news for savers – particularly those reliant on the interest earned off their savings for income,’ said Mr Kneebone.

For example, if you have $100,000 invested now at 3.75% in a 12-month deposit, and rates go up 0.25% you’ll earn a further $250 over a 12-month period (before tax and fees).

‘Whatever financial situation Kiwis are in, our advice is check in with Sorted’s free calculators to see how interest rate increases will affect them,’ said Mr Kneebone.

ENDS

Sorted’s top tips for those with mortgages:

  • Sorted’s mortgage repayment calculator can help you work out much extra you will need to pay if interest rates rise.
  • Talk to your lender now if you’re concerned about the impact of higher mortgage interest costs.
  • If you have a fixed mortgage coming up for renewal or a floating mortgage, ask your lender whether they can offer a better deal than the advertised interest rate. And make sure you shop around. Other lenders may offer you a lower interest rate to get your business.
  • House hunters should also factor in higher interest rates when looking at the affordability of a potential home. See how much mortgage payments at 1, 2 and 3% above your current interest rates would cost and allow for that.
  • As a rule of thumb, mortgage repayments should be no more than 30 to 40% of gross income. Any more than that and Kiwis may be overextending their finances.
  • If your budget is tight now, see if you can reduce some expenses or find ways to increase your income to accommodate higher mortgage payments.
  • Remember, it’s important to have a life as well as a mortgage.

Sorted calculators

Mortgage repayment – sorted.org.nz/calculators/mortgage-repayment

Savings – sorted.org.nz/calculators/savings

Interest rate rise scenarios

Possible impacts on the average New Zealand mortgage ($300,000 mortgage on a 20-year term)

Current scenario for average New Zealand mortgage: $300,000 mortgage on a 20-year term Imapacts of a 25 basis point (bp) increase

Current interest rate at 5.75%

A 0.25% increase in interest increases the rate to 6%

Current fortnightly repayments are $970

Translates to a $20 increase in fortnightly repayments

Current weekly repayments are $485

Translates to a $10 increase in weekly repayments

 

Possible impacts on the average Auckland mortgage ($500,000 mortgage on a 20-year term)

Current scenario for average Auckland mortgage: $500,000 mortgage on a 20-year term

Impacts of a 25bp increase

Current interest rate at 5.75%.

A 0.25% increase in interest increases the rate to 6%

Current fortnightly repayments are $1,617

Translates to a $33 increase in fortnightly repayments.

Current weekly repayments are $808

Translates to a $17 increase in weekly repayments.


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