25/01/2023
This morning's article captured the realities of what these OCR hikes have intended to do and how it's impacted an everyday family.
I admire the Rubin family for bringing this up publicly - It's not easy to put yourselves out there.
However, it doesn't have to be like this. Perhaps their story will inspire others to adjust their perspectives.
🔵 Economies go through cycles of boom/bust.
This is outside the control of the everyday family. However, we can choose how we prepare for this fundamental fact, and how we respond when we're in the midst of the storm.
Has the RBNZ overcooked it? Maybe? However, this is simply outside our control as to what they do and the expectations they set. We need to acknowledge that throughout the course of home ownership, there will be economic ups & downs, and prepare accordingly.
🔵Property is a long-term commitment.
When carrying a home loan, homeowners carry the capital gain/loss on the entire value of the property as well as carrying the interest rate risk on the loan we have.
In the long term, there is capital gain. However, it's not always linear - there are seasons where it's excessive, and seasons where it underperforms. However, if you draw your timeframe out long enough the variations almost disappear.
Interest rates can be fixed between 1-5 years, and the way loans are documented in New Zealand means we are fortunate to have quite a lot of flexibility as to how we manage that interest rate risk.
✔ Splitting interest rate renewal opportunities.
Since we don't know with accuracy what the rates will be in the future, we should consider splitting the interest rate risk to minimize the fluctuation in the market.
✔ Over-pay your loan.
Let's say you decided to have some of your loans on the cheaper short-term rates - at a minimum consider setting your payments up as if they were on the most expensive rate. Better yet, imagine they were set at the level of the banks' stress-test rate. That way you over-pay the loan, and worst case scenario if rates rise to that level there is minimal change to your repayment commitments.
Some banks have re-draw facilities which later become buffers when the economy takes us by surprise
✔ Have an emergency fund.
Life happens! Work to set up an emergency fund to ride out the wave - this is what affords us the option to wait rather than the emergency to sell in a down market. Target at least 3 months of your expenses & financial commitments and use a revolving credit or an offset loan to have those savings work for you. If you've used your entire savings to get on the ladder, prioritize building this emergency fund above other expenses where possible.
✔ Create a strategy.
How do you plan to become mortgage-free? Downsizing? Investing? Over-paying? Clarity with a strategy takes the guesswork out of what to do.
Rising inflation is likely to bring even more pain to young home owners.
