Prior planning is key, budgeting expert says
Mortgage holders concerned about higher interest rates are advised to plan ahead and understand exactly where their money is going, a budgeting expert says.
Mortgage advisers can help clients to adjust by educating them on what their new repayments will be and increasing their payments before their fixed rate term rolls over.
Money coach at Money Mentalist Lynda Moore's suggestions come as New Zealand mortgage borrowers adjust to a more standard level of interest rates.
The official cash rate increased by a further 0.50% in April. The 11th consecutive rise, which takes the wholesale rate to 5.25% drew criticism from National deputy leader Nicola Willis, who warned that it would cause further financial pain, saying that a more careful economic approach was needed, along with a single inflation mandate for the RBNZ.
Moore (pictured above) is a former accountant who combines psychology with numbers. She helps clients understand their relationship with money, identify where their money is going and how spending decisions are made.
Although existing borrowers have been stress-tested at higher interest rates, Moore told NZ Adviser that those who took out mortgages when rates were at record lows were unlikely to have considered that rates in the 6% and 7% range would become a reality. They also did not anticipate the higher cost of living, she said.
“When we were on these low mortgage rates, we should have been putting more onto our mortgage (and paying more off the capital than we have) and now it’s time to pay the piper,” Moore said.
With around 90% of lending on fixed rate mortgages, Moore suggested that mortgage advisers and borrowers first understand when their existing fixed rate was due to expire, and put plans in place ideally six months in advance.
“From an adviser perspective, I would be looking at my database and segment it into timeframes …. e.g. one month, two months, up to six months, and communicate based on how long they’ve got to go,” Moore said.
Moore has suggested four strategies for borrowers to manage higher interest rates – they are summarised below.
1. Increase repayments ahead of time
In line with the process she used with her own clients, Moore suggested that borrowers (with the help of their adviser) answer basic questions, such as ‘How long have we got?,’ and ‘What do the new mortgage payments look like?, including a buffer on what their repayments may increase to.
“[For example], we’ve got six months to adjust from this monthly payment to that [new] monthly payment and we’re incrementally paying more now, because it’s easier to find $50 per week than to suddenly try to find an extra $300 per week,” Moore said.
Moore said she had clients who were now paying an additional $1,000 per month off their mortgage. But because they had worked up to it incrementally, it was less of a jump, she said.
So how do clients find that extra $50 per week? It starts by looking at the basics, in terms of money coming in, and money going out, she said.
2. Look at the actual numbers
When preparing for higher rates, Moore suggested that borrowers start by looking at the numbers. This required logging on to internet banking and reviewing and categorising spending.
While borrowers may say that ‘we spend all our income,’ Moore said it was important that these assumptions were sanity checked.
“The whole thing is ‘what do we spend’… once you know exactly what you are spending, you can apply the rule of cutting back, e.g. ‘do we need three streaming services?’ ” Moore said.
When identifying areas to cut back, for example, cancellation of a service, Moore suggested that borrowers apply the saving to their mortgage directly (assuming the mortgage set-up allows repayments to be increased).
“Whatever you find, immediately apply it to your mortgage payment … if you don’t, it will just get absorbed,” she said.
3. Be organised
Borrowers could also save money by planning ahead, such as when and where they do their food shopping, Moore said.
While it may be easy to pop to the dairy for convenience, there are opportunities to save money simply by being organised, she said.
“It is those fundamentals that our parents did … keeping a shopping list, clearing out the freezer and those ‘quick wins’ that can be achieved just by looking around and being smarter with time,” Moore said.
An effective budget, which Moore preferred to describe as a ‘money plan’ identified the “low hanging fruit,” whether it be saving on energy costs (e.g. switching providers), comparing prices on general insurance (and/or paying annually instead of monthly) or bundling utilities such as internet and phone.
Rather than a “slash and burn” approach to budgeting, where all discretionary spending was cut, Moore suggested that borrowers look at the psychology of why they were spending and look to make some adjustments.
For example, one of her clients spent money on coffee on three different occasions throughout the day: at the coffee shop each morning, with his partner and as a pick-me-up when working late.
“The first thing I said was which are you comfortable cutting back on … his response was, ‘the Saturday morning coffee will not go because that is about my relationship’,” Moore said.
4. Identify extra income sources
For borrowers who were concerned their current income was not sufficient, Moore suggested they look for ways to bring more money into their household.
For example, one of Moore’s clients turned her passion for music into extra income, teaching music to children. Another offered gardening services to a sector of the community she identified was unaffected by rising mortgage rates.
“Not everyone has a mortgage … there is still a sector of the community who are not impacted by this and if you have some skills, [ask yourself] ‘who are these people?’ ” Moore said.
When recommending options to clients, Moore suggested brokers consider their client’s overall cashflow, along with other implications, such as tax. For example, from a cash flow perspective, it may make more sense for a client to rent out their house and live somewhere else, she said.
“I think the best advice that a broker can give is looking at the amount of stress a client is under and their serviceability,” Moore said.
Brokers should not be afraid to have robust conversations with clients about their options, to help them avoid more financial stress later on, she said.
How are your clients managing higher mortgage repayments and are you seeing an increased need for budgeting advice? Share your thoughts in the comments section below.
