When mortgage rates start to rise
It's one of the housing market's great temptations: to buy a dream house that's just within one's budget, paying no heed to the risk that interest rates will rise.
That temptation has been even greater lately because of the historic lows to which interest rates fell. But like all good things, that is coming to an end. Interest rates have risen 1 percentage point in recent months.
While the rates seem to be on pause right now, they are expected to resume their upward path about the end of the year.
For households with mortgages on tight budgets, that is dangerous territory, and the time has probably arrived for many of them to start thinking about where they are going to find some extra cash.
Here are some suggestions.
Renegotiate your mortgage
"If people are really struggling, that's the first thing they should do, is talk to the bank," says financial advisor Liz Koh.
After all, she says, it is in the bank's interests to keep your mortgage going.
If your cashflow is at crisis point, there are some of the short-term measures to get you over the hump. They include extending the term of your mortgage, only paying interest (no principle) or taking a ''mortgage holiday" - a short break from your mortgage. These relief options have to be juggled against your long-term interests, Koh cautions.
''It's not desirable, put it that way. In the longer term you would end up paying more interest, but it's to alleviate your short-term situation."
Some mortgages also have hardship provisions which could ease your pain. If you have been made redundant or suffered some other major set-back, you should also check the details of any mortgage insurance you may have.
Check your food spend
The second place people traditionally tend to turn to when their mortgage repayments rise is their food budget.
For some, there won't be much money to trim. In other cases, a fresh look at what is going in their trolleys could shock them.
"There is a huge variation in what people pay every week for food," says Koh. "You could easily save $50 to $100 a week depending on how you shop."
Of course, it's not just food but all discretionary spending one should look at.
"We see people not allowing enough for food rather than too much," says Raewyn Fox, of the New Zealand Federation of Family Budgeting Services.
But she stresses there is also no harm in being proactive about seeking budgeting help if you suspect trouble is on the horizon.
The advice is free, ''totally confidential and they just might be able to do an assessment of stuff you haven't thought of."
You may have a bunch of shares you've never considered selling or a shed that needs a clearout. Selling belongings is only a short-term solution but it may get you through a bad patch.
Take in a border/exchange student
A time-honoured way of increasing one's income on a longer term basis.
Taking an exchange student is a bit of a lottery but it can be a delightful addition to the family. They also come with a built-in date for their exit if things are not going so well.
Exchange programmes vary in what they offer in terms of recompense to hosts. One of the better ones offers a stipend of $500 a month.
Sadly, there have been times when a host has been more interested in the money than the student.
Cases where students have felt too shy to ask for food, are treated like au pairs, or have even been asked to lend to their host family are simply not on.
Exchange programmes are alert to this and will check your references. The ideal host is one who is prepared to take good care of a teenager who is away from their family and who is linguistically on the back foot.
Invest in yourself
Consider pushing for a pay rise, or even a change in direction.
Instead of watching the tele at night, why not pick up a course, look for a job where you will move up the ladder, or consider launching a business.
The Careers New Zealand website has plenty of tools and ideas for those who are thinking about changing course but perhaps don't know where to start.
Fox fully supports the idea of upskilling. But she says there is also often work that can be had by looking around you.
"It may be that there are things you are doing you haven't thought about - selling crafts, doing baby sitting."
Beat the system
Rising interest rates in the mortgage sphere also mean rising interest rates for savings.
In theory, it's possible to try to offset your mortgage rate increase with a nest egg invested elsewhere, but this is not recommended for anyone already in debt.
That is because the interest rates on a mortgage usually always outpace what you can earn elsewhere after tax.
Wealth planner and author Martin Hawes says it is not just the return that you have to keep in mind.
"If for example you bought a bunch of shares, over the long-term you'd expect a return of about 10 per cent before tax, or let's say, 8 per cent after tax.
"But what you have to take into account is the risk of that share portfolio, and when you adjust for risk, you're much better to take the savings of 6 or 7 per cent with no risk."
A better option might be a revolving mortgage. All your money including savings is put in the same account that your mortgage leaves from.
"That can quite seriously reduce your interest but you have to be really disciplined, and you have to really understand what's happening," says Fox.
Hawes makes a couple of exceptions to investing elsewhere while you still have a mortgage. He believes in Kiwisaver, because it is subsidised, and possibly in one-off opportunities, like buying shares in a successful family firm that you know well.
He also does not discourage people from investing a little on the side for learning purposes while they have a mortgage. But only if they can afford it.
The worst of the interest rate rises probably has not been felt yet. But Koh says there will be those who ''mortgaged themselves up to the hilt" and have not left enough wiggle room.
For those people, it could be better in the long-term to consider downsizing, particularly if the kids have left and you have more room than you need.
''People being what they are, they see the house of their dreams and go for it, and then the crunch comes," says Koh.
So often, she says, new buyers fail to ask themselves, if mortgage rates go up 2 to 3 per cent, will this mortgage still be affordable and can it be sustained for five to 10 years at that level?
''Interest rates go in cycles, so in two to three years I think it will be at neutral, in terms of the cycle. What happens from there is anyone's guess."
Hawes agrees that taking a ''long, hard, dispassionate look" at selling your house is not the worse thing that can happen to you.
And with the housing market starting to slow, it's better to do that sooner than later.
''I've seen a lot of people who have held on to the house in a rising interest rate cycle and they hold on too long, and instead of jumping at a time when they are in control, they get pushed by the bank."