The message to homeowners has gone out loud and clear in the wake of the first interest rate rise for nearly five years: fix your mortgage rate now.
Find a repayment schedule you are comfortable with, and lock it in before further increases hit floating rates.
Reserve Bank governor Graeme Wheeler raised the official cash rate (OCR) from 2.5 per cent to 2.75 per cent yesterday. As the OCR rises, banks increase their mortgage interest rates, hitting homeowners in the wallet.
Further rises are forecast over the next year.
Floating mortgage rates are now about 5.75 per cent, but could rise to 8 per cent or higher in the next couple of years, if the Reserve Bank moves the official rate as much as expected.
A rise of one percentage point by the end of this year would add another $20 a week to mortgage payments for every $100,000 borrowed.
ANZ responded to the rise immediately by lifting its floating and flexible home loan rates to 5.99 per cent and 6.10 per cent respectively. It also increased the interest rate earned by savers on its main deposit product, Serious Saver, to 3.9 per cent.
Other banks had not followed suit yesterday, but sent clear signals they intended to do so soon. Financial experts said it was time for homeowners to fix at least part of their mortgages, if they could afford to and had not already done so.
Lower Hutt financial adviser Alan Borthwick said: "If your cash flow is a significant issue which a rates rise will impact, you need to look to fix rates now. Even if it might be higher than a floating rate right now, it's about future-proofing."
Porirua financial adviser Eddie Ellison said most people would have taken the advice to lock in interest rates. "They've got the comfort of knowing what is coming for the next couple of years . . . you need to get certainty."
Prime Minister John Key said homeowners would be hit by the interest rate rise, but it was the result of a strong economy.
"It's true we are the only developed country in the world that's currently raising interest rates, but that's because we are growing at a faster rate than most other countries around the world, and we've got a very robust outlook," he said.
"So while I think there will be some disappointment and frustration from homeowners, on the other side of the coin they can take real confidence that the strong economy will underpin good job opportunities and probably wage growth over time."
The OCR has been at 2.5 per cent since early 2009, apart from a small blip in 2010.
Savers, such as term deposit holders. Interest on savings has hovered between 3.5 per cent and 4 per cent for several years. That will now rise, though the advantage will take several months to kick in.
People on fixed-rate mortgages. The fixed rate for two years of borrowing will stay the same, however much interest rates rise.
People on floating mortgages. You may be getting a better rate than those on fixed terms right now, but as interest rates rise, so will your repayments.
First home buyers. Already hit by the loan-to-value restrictions, they now face having a much more expensive mortgage than they might have done a year ago.
MORTGAGE BUDGETING ADVICE
Use a mortgage repayment calculator - such as those on the sorted.org.nz website - to work out how much extra money you need to pay.
Talk to your bank or a financial adviser about the impact of higher mortgage interest costs.
If you have a fixed mortgage coming up for renewal, or a floating mortgage, ask your bank whether they can offer a better deal than the advertised interest rate.
Factor in higher interest rates if you are looking at the affordability of a potential home.
Rule of thumb - keep mortgage repayments to no more than 30 to 40 per cent of total income.
- The Dominion Post