What if mortgage rates go up? How to cope with rising home loan costs

Rising interest rates may put a squeeze on your household budget but approaching the problem with a plan can make it all easier. So, start preparing early before your interest rates increase and you’ll find the transition much easier.

If your fixed interest rate period is about to end, speak to your bank or mortgage broker far in advance of the change. They’ll be able to help you calculate your new repayments, advise you what your new interest rate could be, and lock in your new rate up to three months in advance.

It’s a good idea to do this two to three months before your rate is due for renewal to give you as much time as possible to plan and prepare.

Before your mortgage payments change it’s a great idea to download a few months of your bank transactions and take a close look at where your money’s going. Budgeting tools like Pocketsmith can help automate this and split your spending into categories like entertainment, groceries and fuel.

Once you’ve taken a good look at your budget ask yourself — are you overspending in any areas? Are there any expenses you can easily cut back to make room in your budget? Every little bit matters and cutting back spending is the easiest and least costly way to cope with interest rate rises.

If cutting costs isn’t going to work you may be able to find relief from rising rates by restructuring your loan – speak to your mortgage broker or lender about whether this could work for you. If you’ve had your loan for a while, or you’ve arranged a term less than 30 years, increasing your loan term while interest rates are high could be a great way to make life easier.

For example, let’s say you’ve got a $500,000 home loan with a 7.3% interest rate and a 20 year term – your repayments will currently be $3,968 per month. If you increase your term to 30 years, your repayments will be just $3,428 (that’s a saving of $540 per month and $6,480 per year). Keep in mind that, by extending your term, you’ll pay more interest over the life of your loan.

You could also consider other loan features such as offset accounts. These allow you to link a savings account to your mortgage, and reduce the principal amount that you pay interest on by whatever amount is in that account.

If you can’t make ends meet and you need short term relief, it may be worth talking to your lender or mortgage broker about whether an interest only loan could work for you. An interest only loan is exactly what it sounds like – you won’t make any repayments on the principal owing, you’ll only make interest payments.

For example, let’s say you had the same $500,000 home loan, 7.,3% interest rate and 30 year term we mentioned earlier. If you pay principal and interest, your monthly repayments will be $3,968, whereas if you pay interest only they will be almost $1,000 lower ($3,042).

Your last option, in extreme cases, is to request a mortgage holiday from your bank. This is a short term break in repayments, and is usually only an option if you’re experiencing genuine financial hardship. Talk to your lender or mortgage broker about whether this is an option for you, but keep in mind that interest will keep accruing during your mortgage holiday and you may owe more afterwards.

If you’re struggling to manage your finances and your debt, there is help available – and it’s always best to reach out early, before you’re in real trouble. Here are a few free services you could use:

• CAP provides a free debt management service. Call them for free on 0508 227 111.
• Debtfix is another charity that provides a free service to help people struggling with debt. Contact them here.
• MoneyTalks is a free service that helps people with all money matters, including debt. Contact them here.

It may also be worth talking to a mortgage broker to help clarify your options and advocate on your behalf with your bank.