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Preparing for the Rise in Interest Rates

Preparing for the Rise in Interest Rates

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Interest rates are all set to rise as the Reserve Bank of New Zealand has increased the official cash rate to 3.5 percent. It indicates that the interest rates and the cost of borrowing are set to rise, making it more expensive to borrow money, and also increase the interest rates on existing mortgage rates. Are you wondering how it will work? To what extent will it impact you, the home owner and payer of monthly mortgage payments? How can you be prepared to face the rising costs? Here are the answers to your queries.Official Cash RateThe Reserve Bank of New Zealand is the monetary authority of the nation. It formulates monetary policies and monitors cash flows in and out of the economy, among other duties. It is also the regulatory body for all banks and the bankers in the land.The Official Cash Rate (OCR) published by the Reserve Bank is a monetary tool that controls the interest rate in the NZ economy. It works by setting an interest rate at which the banks can borrow and settle money from the Reserve Bank. This ensures that the banks can lend money to the public at a certain fixed amount. If they decide to go over that percentage, they will lose out to the banks that don't and if they lend at less than the specified amount, they will not make enough profit. This simple measure gives the Reserve Bank control over the market's interest rates.How it affects youThe interest rates have a direct influence on the general public. If the rate of interest declines, it may demotivate you from saving, making it more likely for you to spend more. It also means that money will be more readily available to you. If there is an increase in the interest rates, it spurs savings as the banks offer more interest. Another effect of the rise in interest rates is the increase in monthly mortgage payments. The Reserve Bank has, in the last month increased the OCR by 25 base points, from 3.25 percent to 3.5 percent and more upward jumps are expected in the next year.Preparing for the rise in ratesThe year has already seen four hikes in the OCR, which has been a cause of worry for a lot of the people paying mortgages payments. The estimated increase, on a mortgage of $100,000 mortgage, will require you to pay nearly $20 more every month on an average. If you are on a $500,000 mortgage, you will be paying up to $96 more a month. You will have to be prepared for these extra payments that come your way. So far, most major banks have already hiked their interest rates and all they have to say to their end customers is to be prepared for it. Here are some useful ways to prepare for this financial blow.

  • Make cutbacks in your budget
  • Clear off any remaining short term loans and debt
  • Create a contingency fund
  • Do not miss any loan payments
  • Be wary of revolving credit
  • Consider applying for mortgage holidays

These are a few basic ideas that you can incorporate into your monthly budget. Increased payments do not mean that you are going to fall into a credit spiral and lose out your home, unless you don't plan ahead. By now, you will have realized the importance given of saving and having a good working budget. So sit down, prioritize and work out where you can fit this increase, without it bogging you down.