New Zealanders looking to cut essentials as interest rates rise

• 20% of home owners are likely to extend the term of their mortgage to cover rates rises

Ahead of anticipated interest rate rises this year, BNZ Financial Futures Research shows that most homeowners with mortgages aren’t too fussed about a $80 increase each fortnight. But upwards of a $120 increase is a different story.

The research set out to understand at what point people would start to feel the pinch, and at what point would they need to reassess their budget. For most, a mortgage repayment increase of $80 per fortnight would be overcome by cutting a few luxuries.

However, the findings saw a noticeable change in what people would do when the mortgage payment increased by $120 per fortnight. Nearly one in three said they’d look to reduce utilities like insurance, petrol, heating and power, and one in fiveplanned to extend the term of their mortgage so that the payment amount stays the same.

Paul Carter, BNZ’s Director of Retail and Marketing, says it’s important New Zealanders understand all their budgeting options as the mortgage environment looks set to change.

“New Zealanders will still be enjoying some of the lowest rates in a generation. So it concerns me that too many people are jumping straight into what seems to be the easy option, which is a couple more years on the mortgage – especially when the changes we’re talking about are small.

“BNZ, like most New Zealand banks, stress-tests people with mortgages at an interest rate higher than the current rates, so we know that budgets and incomes can manage rate rises much bigger than this.  

“So while we know our customers have room to move within their budgets to absorb any rises, it’s particularly concerning that 20% of people with mortgages would extend the term of their mortgage if their repayments increased by $120 or more, as this is only going to set them back in the long term,” says Mr Carter.

More than one in three people (35%) also admitted that they’d fund interest rates out of their savings, including retirement savings. This was particularly true for under 30s. Whereas people over 50 with mortgages were slightly more likely to spend less on non-essentials like eating out, entertainment, clothes and shoes. 

“It’s a good idea to occasionally have a sobering conversation about the household budget and consider some ‘what ifs’.

“What are you prepared to make a small sacrifice on to either adjust to new rates or to proactively plan to reduce the interest you pay on your mortgage overall and cut the time it will take to pay it off?

“It’s important to look at the big picture when it comes to finances, because a restructure or a slight tweak to your weekly budget or mortgage structure could have a big impact in the long run,” says Mr Carter.

Mr Carter admitted he was surprised to learn that only 9% of home owners would talk to their bank about using their savings to offset their mortgage interest.

“Offsetting is a very sensible way to save on your mortgage and worth considering,” Mr Carter said.

The BNZ Financial Futures research also found that New Zealand home owners with mortgages were in the dark about how much they’d be impacted by a 1% interest rate rise – three out of five people underestimated how much extra people will pay on the average mortgage size.

“It’s concerning that despite 70% of people with mortgages anticipating interest rates will rise this year, 67% of mortgagors are not considering making any changes to their mortgage.