Interest rates are rising - what should home owners do?

Interest rates are rising. Ben Kelleher, ANZ’s Managing Director of Personal Banking, explains the steps you can take to save you money and check your home loan is working for you.

The increase in the Official Cash Rate has ended what has been a period of very low interest rates in New Zealand.

But home loan rates are still low by historic standards.

That’s why we’re encouraging our home loan customers to review their lending arrangements and consider paying off as much of their debt as they can.

The increase in the Official Cash Rate from 0.25% to 0.5% will have an immediate impact on anyone who is on a floating rate and will soon start to impact most people that have a fixed rate home loan.

That’s because Reserve Bank figures show around three quarters of fixed rate home lending is due to roll off within twelve months.

That’s why it’s important that everyone with a home loan thinks about how they would cope when rates rise.

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With rates currently still at very low levels,  it’s a good idea for home owners to consider whether they have structured their lending in a way that bests suit their financial and personal circumstances.

And, if you can afford to, it’s also an opportunity to consider if you could increase your repayments. This could save you thousands of dollars over the life of the loan.

Here are some ideas you could consider. But remember, everybody’s situation is different. It’s important to structure your home loan in a way that best suits your circumstances and financial situation.

"Think about whether you could increase your repayments. It could save you thousands of dollars over the life of the loan."

Tailor Your Home Loan

The way you structure your home loan can help you pay less interest and could take some years off your home loan.

Different loan types provide varying levels of flexibility for making extra repayments.

You don’t have to choose one type of loan.  You can combine the different loan types to suit your needs.

It’s important to tailor your home loan to your specific circumstances, as one size doesn’t fit all. And you should review the structure regularly as your circumstances change.

Home Loan types

With a fixed rate home loan, the interest rate is locked for a fixed period. During that period your repayment amount stays the same, which is helpful for budgeting. You always know how much you will be paying.

Having a mix of fixed rate home loans (for example some of the loan on a one year fixed term and some on a three year fixed term) could be a good way to manage the risk of interest rate changes over time.

A floating home loan, offers more flexibility. It allows you to make extra repayments whenever you like without incurring a fee. You can switch to a fixed rate without paying fees. The interest rate can move up or down in line with market changes which means repayment amounts can change.

A flexible home loan is a revolving credit facility on an everyday transactional account. If you’re good at managing your money, this option could help minimise interest charges or repay your home loan sooner, while giving you access to credit when you need it.  It often has the highest interest rate and a monthly fee.

Increasing your repayments when you can

Increasing your repayments could save thousands of dollars and may reduce the life of your home loan by a number of years.

To illustrate, let’s say for example, you have a home loan of $400,000 at an interest rate of 4.00% per annum that remains the same for thirty years, and your weekly repayments are set at $440.  If you increased your repayments by $30 a week from the beginning of the loan you would reduce your interest costs by around $37,727 over the life of the loan, and pay the loan off 3 years and 5 months earlier. [1].

It’s important to remember that if you increase your repayments during a fixed rate period, your bank may charge an early repayment fee. So you should find out how much that might be and work out whether it still makes sense.

[1] The example above provides an estimate/illustration only. It is a guide on how a $400,000 home loan originally structured on a 30-year term could be paid off faster and is based on the assumption that the 4.00% p.a. interest rate remains the same for the duration of the loan.

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Other things to think about

When you first take out a home loan, if you can you should consider paying any loan establishment fees or legal fees up front from your own savings rather than adding this amount to your loan.

If your fixed rate home loan is about to expire, it may be a good time to review your repayment amounts.

So what is the right loan structure?

It’s something we get asked a lot. But there is no one single correct answer. As I said earlier everybody’s situation is different.

Your lender can help you set up or restructure your home loan to suit your specific circumstances – and help set up your repayments to pay the loan off faster.

Paying off your home loan faster is a great goal, it is also important that you consider it as part of your wider savings and financial goals.

This material is for information purposes only.  We recommend seeking financial advice about your situation and goals before getting a financial product.