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NZers looking to cut essentials as interest rates rise

MEDIA RELEASE
12 April 2017

New Zealanders looking to cut essentials as interest rates rise

20% of home owners are likely to extend the term of their mortgage to cover rates rises

Ahead of anticipated interest rate rises this year, BNZ Financial Futures Research shows that most homeowners with mortgages aren’t too fussed about a $80 increase each fortnight. But upwards of a $120 increase is a different story [extract 1].

The research set out to understand at what point people would start to feel the pinch, and at what point would they need to reassess their budget. For most, a mortgage repayment increase of $80 per fortnight would be overcome by cutting a few luxuries.

However, the findings saw a noticeable change in what people would do when the mortgage payment increased by $120 per fortnight. Nearly one in three [extract 1] said they’d look to reduce utilities like insurance, petrol, heating and power, and one in five [extract 1] planned to extend the term of their mortgage so that the payment amount stays the same.

Paul Carter, BNZ’s Director of Retail and Marketing, says it’s important New Zealanders understand all their budgeting options as the mortgage environment looks set to change.

“New Zealanders will still be enjoying some of the lowest rates in a generation. So it concerns me that too many people are jumping straight into what seems to be the easy option, which is a couple more years on the mortgage – especially when the changes we’re talking about are small.

“BNZ, like most New Zealand banks, stress-tests people with mortgages at an interest rate higher than the current rates, so we know that budgets and incomes can manage rate rises much bigger than this.

“So while we know our customers have room to move within their budgets to absorb any rises, it’s particularly concerning that 20% of people with mortgages would extend the term of their mortgage if their repayments increased by $120 or more, as this is only going to set them back in the long term [extract 1],” says Mr Carter.

More than one in three people (35%) [extract 1] also admitted that they’d fund interest rates out of their savings, including retirement savings. This was particularly true for under 30s. [extract 2] Whereas people over 50 with mortgages were slightly more likely to spend less on non-essentials like eating out, entertainment, clothes and shoes[extract 2].

“It’s a good idea to occasionally have a sobering conversation about the household budget and consider some ‘what ifs’.

“What are you prepared to make a small sacrifice on to either adjust to new rates or to proactively plan to reduce the interest you pay on your mortgage overall and cut the time it will take to pay it off?

“It’s important to look at the big picture when it comes to finances, because a restructure or a slight tweak to your weekly budget or mortgage structure could have a big impact in the long run,” says Mr Carter.

Mr Carter admitted he was surprised to learn that only 9% [extract 3] of home owners would talk to their bank about using their savings to offset their mortgage interest.

“Offsetting is a very sensible way to save on your mortgage and worth considering,” Mr Carter said.

The BNZ Financial Futures research also found that New Zealand home owners with mortgages were in the dark about how much they’d be impacted by a 1% interest rate rise – three out of five [extract 4] people underestimated how much extra people will pay on the average mortgage size.

“It’s concerning that despite 70% of people with mortgages anticipating interest rates will rise this year, [extract 5] 67% of mortgagors are not considering making any changes to their mortgage [extract 3].

ENDS

The BNZ Financial Futures research was conducted by Colmar Brunton, a New Zealand Market Research Company. The purpose of the research was to understand general financial behaviour and attitudes of New Zealanders, and the impact of rising house prices on attitudes to owning your own home. Online interviews were open to 18+ respondents from Wednesday 15 February 2017 to Friday 24 February 2017, surveying a total sample size of n=2,000.

Extract 1
If your repayments increased by $80/$120 a fortnight, how would you pay for this increase?

$80$120
Spend less on fun things in my life like eating out and entertainment54%57%
Spend less on clothes and shoes37%42%
Spend less on food and other groceries29%37%
Save less for retirement/save less in general28%35%
Reduce other overheads like insurances and weekly bills (petrol, heating, power)20%30%
Spend less on gym/sports19%23%
Spend less on things I think of as essential, such as visits to the GP and school uniforms13%17%
Extend the term of my mortgage so that the payment amount stays the same10%20%
I could absorb the increase without noticing any difference17%10%
I wouldn’t need to make any changes5%3%
Don’t know7%11%

Extract 2
If your repayments increased by $80/$120 a fortnight, how would you pay for this increase?
If your repayments increased by $80/$120 a fortnight, how would you pay for this increase?

18-29 years30-49 years50-64 years
$80$120$80$120$80$120
Spend less on fun things in my life like eating out and entertainment56%54%53%59%57%59%
Spend less on clothes and shoes37%36%37%42%39%49%
Spend less on food and other groceries30%35%28%40%30%35%
Save less for retirement/save less in general35%39%24%34%32%38%
Reduce other overheads like insurances and weekly bills (petrol, heating, power)28%32%15%28%25%35%
Spend less on gym/sports25%29%18%20%20%29%
Spend less on things I think of as essential, such as visits to the GP and school uniforms19%23%12%16%14%19%
Extend the term of my mortgage so that the payment amount stays the same14%28%9%17%10%24%
I could absorb the increase without noticing any difference12%5%17%10%18%10%
I wouldn’t need to make any changes3%3%5%3%6%5%
Don’t know9%15%6%7%5%12%

Extract 3
Are you considering making any of the following changes to your mortgage structure

Changes to mortgagePer cent
Increase the proportion of my mortgage that’s fixed16%
Talk to my bank about using my savings to offset my mortgage interest9%
Extend the term of my mortgage to keep repayments the same or reduce how much I pay6%
Increase the proportion of my mortgage that’s floating6%
Incur fees to break my fixed mortgage early5%
I don’t want to make any changes to my mortgage39%
I want to make changes to my mortgage, but I can’t8%
I haven’t thought of making changes to my mortgage20%

Extract 4
The average mortgage is New Zealand is around $275,000. If interest rates were to rise by 1% this year to 5.79% (current interest rate of 4.79%), how much do you think the fortnightly repayments on this mortgage will increase by?

IncreasePer centOverall percent
$0-103%
$11-207%
$21-3011%
$31-409%60%
$41-5011%
$51-6014%
$61-706%
$71-806%Correct answer
$81-903%
$91-1006%35%
$101+25%

Extract 5
What do you think will happen to home loan interest rates this year?

Increase70%
Decrease4%
Stay the same26%

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