Last year’s RBNZ Official Cash Rate announcement saw a rapid increased rate and the public acknowledgment that it is now deliberately leading the country into recession, as an economy tool to bring the high inflation under control.
If the year of 2023 is going to be a Year of Recession, the key challenge facing us all is how to survive at higher interest rates, here are few ideas to consider.
1. Pick up the old powerful tool of a budget
It’s very important to make a time to push “the pause bottom” and go through a process of building out a budget to see full details of how much you are spending, on what and where you might be able to cut back. Our current consumer shopping habits especially online purchase via credit cards, means it is so easy just a click and spend on the things we did not even want or need. It all adds up.
You can easily download a couple of month’s bank statements into Excel, Google sheets and itemise all your spending. Bank’s website also offers free online tools to track your budget automatically form the bank statement, which can be a very powerful tool to budget your spending.
2. Preparation is the key
Don’t ignore the fact that your mortgage repayment(s) are higher or will be higher when current fixed rate expires. Instead, finding out exactly what the additional repayment amounts are once it switches into higher interest rates.
After you figure out abovementioned budget, you will need to feature the higher repayment amount into the equation. It is so easy to assume that mortgage repayments also double when interest rates do. However, the fact that a portion of the loan repayment is contribute the loan principal as principal payment portion, therefore, its only the interest portion of the payment will be doubling. From there, make a realistic plan to prepare.
Refinancing current mortgage to another lender, what could be potential cash contribution offer, better interest rates offer, more suitable loan structure options, say interest only for a while, restricting loan(s) into a combination of floating loan plus a redraw facility to potential allow flexibility while save interest costs.
3. Saving by making small changes in spending habits
Looking closely with our regular spending habits such as takeaways, coffees, dining out, buying drinks, nice to have items, make small changes like cook more often instead of takeaway or dining out. Thinking carefully before purchasing those “nice to have” items. There are lots of little ways we can save by being a bit more aware of how we are spending. We will be surprised that how much we could save.
4. Avoid consumer debt at all costs and consolidate higher cost debts into a home loan if possible
When our budget gets tightened, it can be very tempting to use the credit card or high interest consumer finance option to bridge the financial gap to maintain certain lifestyle. But it can be difficult to recover from if people started to reply heavily on consumer debt option.
Generally speaking, wherever there is higher interest loans such as car loans, credit cards, consolidating those loans back into the mortgage is a really effective way to save interest costs.
5. On a positive note, things usually temporarily get worse before it gets better
No doubt the next 12 to 18 months can be a tough time, however, I have been through a period of mortgage rates being 9% in 2006 and worked through last recession in 2008.
The key challenge for all of us is to sit still, think and plan carefully, find a way to make things work through year 2023, remember there is always light at the end of the tunnel. Let’s hope through the process we learn not only just to survive but also how to manage our finances better.
Disclaimer: We recommend that you seek personalised professional advice from your trusted adviser before taking any action as each applicant’s situation can be vary, the above content is only general commentary.
As always, we are here to help and support, get in touch with us today.
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