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Navigating Mortgage Rate Fluctuations: Managing Financial Stress

Learn how to manage the impact of rising mortgage interest rates on your finances with proactive strategies and expert guidance. Discover ways to adjust your budget, communicate with your bank, and explore refinancing options to navigate this financial challenge with resilience.

Navigating Mortgage Rate Fluctuations: Managing Financial Stress
Photo by charlesdeluvio / Unsplash

Continuing from my article earlier this year on budgeting (find it here) and the impact of financial stress on the brain, today we address an issue that has been causing sleepless nights for many homeowners: the rise in interest rates.

With mortgage interest rates rapidly increasing from the record lows of a few years ago to around 6-7%, mortgage rates have doubled or even tripled for some households. In this article, we explore strategies to manage this financial challenge while maintaining a level head.

First and foremost, adjusting your budget in challenging times is key to regaining control and weathering the storm. Proactive budget management and gaining an understanding of your mortgage expenses, both present and future, are excellent ways to establish a solid foundation and comprehend the potential impacts of interest changes on your life. It's important to know the scale of the mountain before you start climbing it.

Start by establishing some perspective. Remember that the magnitude and pace of the interest rate changes you are experiencing differ in many ways from those of previous generations. Some of my retired clients compare today's interest rate changes to the sky-high rates of the 1980s. However, it's important to take these comparisons with a grain of salt since the magnitude of change is significantly different, and you're navigating a different financial landscape. (For example: In the 1980s, the average New Zealand house price was between two-to-three times the average annual household income. Today, the average household income is around $120,000, with the average house price nearly $900,000.)

Furthermore, it's important to understand that the rise in interest rates is not your fault, nor is it unreasonable to have expected low rates to persist for a long time. Economists, central banks, and the media were anticipating a slow and challenging economic recovery from the Covid pandemic. The actual outcome differed, and only those with the ability to predict the future could have made decisions based on differing views.

If there's a thin silver lining, take comfort in knowing that you're not alone in this situation. As of March, it was projected that roughly half of all mortgages (by value) would transition to higher interest rates within 12 months. So, many others are facing this challenge alongside you, offering solace in shared experience.

So, what can you do about it?

Opening lines of communication with your bank or mortgage broker can make a significant difference in alleviating the financial stress caused by rising interest rates. Discussing your concerns and exploring potential solutions with either of these parties can provide you with a clearer understanding of the available options. Notably, each of the major banks has a team specialising in financial hardship and finding solutions to assist you.

Consider refinancing your mortgage as a potential tool for mitigating some of the effects of rising interest rates. Although it has longer-term implications, reducing monthly payments can ease financial stress and provide necessary flexibility. Understanding the process, requirements, and potential benefits is crucial to making an informed decision. This is also an opportune time for your bank or mortgage broker to provide valuable guidance.

Remember, while facing a rise in mortgage rates may seem daunting, proactive strategies, open communication, and expert guidance can help you navigate this challenge with resilience.

About the Author: Adam Thompson a Principal, Financial Adviser & Financial Planner at Rutherford Rede (Rutherfordrede.co.nz). He specialises in helping people invest larger sums of money and in working out “how much money is enough”, particularly as they plan or prepare for retirement.

Disclaimer: This is general information only, is not intended to constitute financial advice, and does not take your individual circumstances and financial situation into account.

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