What should you do in the face of rising interest rates?
Restructure, refinance or just hold tight?
It’s time to think about your loans and how to tailor it to suit your situation.
There’s a feeling among many economic commentators that interest rates will continue to rise. This is on the back of the Reserve Bank announcement on the 6th October and 24th November which saw an increase in the Official Cash Rate (OCR) by 0.25% at each announcement making the OCR 0.75%. This was expected given the high inflation and low unemployment rates in NZ. The graph illustrates the magnitude of inflation at present in NZ and we are outside the RBNZ target range of 1-3%
In the latest Monetary Policy Statement the RBNZ has forward tracked the OCR increases with the peak expected to be 2.6% in 2024 vs the 2.1% in 2024 previously forecasted.
A higher OCR translates into higher loan interest rates for borrowers. How much interest rates increase by, and how quickly, is anyone’s guess – although the market prices increases and decreases in anticipation. For example, the home loan rates for 1 year have increased by approximately 1% in less than 6 months.
In historic terms we are starting from a very low base as illustrated by 90 day bank bill rate and OCR graph below and at some point this was going to change.
Given that interest rates can be hard to predict, the focus needs to be on your own personal situation or business and how it can handle this risk.
Key aspects to consider when making interest rate decisions:
- Your overall debt position and the cash required to service this debt: Whether that be for your household or business, what ability do you have to handle higher interest rates? Budgeting and forecasts will help you get a feel for this, if you find that your financial position is under pressure at current rates you may want to consider fixing a higher portion of debt to help mitigate this risk.
- Fixed vs floating or certainty vs flexibility: Consider what flexibility you require, is there benefit of having the ability to repay debt at any time by having some of your debt floating? Are there any products available from your financier that better suit your needs eg: Flexi facility. Or as mentioned in the point above, are you in a position that you need the certainty of longer term fixed rates
- Cost effectiveness: In normal circumstances short term rates are cheaper than long terms rates (positive yield curve). You need to be in a position to handle interest rate increases if you use the short term rates, especially in an increasing interest rate environment. Consider having your loan split over various terms so not all your debt rolls off fixed terms at the same time, this spreads the risk.
- Debt repayment and restructuring loans: Consider your loan term – this is how long you will take to pay off the loan. Are you in a position to shorten the loan term up without putting undue pressure on yourself. Doing this can dramatically decrease the amount of interest you pay over the life of the loan.
- Discuss your interest rate strategy with your professional & trusted advisors: Build a plan together, know how interest rate risk can affect you or your businessand mitigate this risk using the tools available to you. This will remove any unneeded and unforeseen financial pressure.
If you want advice around your interest rate changes please get in touch with Nick Lawn to discuss this with you.
Article by Nick Lawn