Inflation is rising – what impact will that have on your mortgage?

New Zealand is currently in a situation we haven’t experienced for 30 years, with inflation at a high of 7% and economists are predicting this to rise further. Since Russia’s invasion of Ukraine, the cost to produce products and services has increased further, which has a knock-on effect of pushing prices up in a range of ways, for consumers in New Zealand.

Before we look at the impact of this rising inflation on your mortgage, let’s take a step back to recap what inflation actually is and what causes it. The Reserve Bank of New Zealand says “Inflation is the term used to describe a rise of average prices through the economy. It means that money is losing its value. 

The underlying cause is usually that too much money is available to purchase too few goods and services, or that demand in the economy is outpacing supply. In general, this situation occurs when an economy is so buoyant that there are widespread shortages of labour and materials. People can charge higher prices for the same goods or services.
Inflation can also be caused by a rise in the prices of imported commodities, such as oil. However, this sort of inflation is usually transient, and less crucial than the structural inflation caused by an over-supply of money”.
No doubt you have personally felt this rise of average prices – your weekly supermarket shop and filling up at the pump, being two such examples.

Impact of Inflation on Home Loan Interest Rates

In essence, rising inflation means the cost of borrowing goes up and with that comes an increase in home loan interest rates. Normally in a situation like this you will start to see a shift in the market. Those selling a home are still wanting a certain price for their property, but buyers may struggle to pay those prices as they need to consider the higher interest rates and what lenders will approve, meaning they might not be able to borrow as much as previously.

Impact of Inflation on Your Mortgage

The increase to inflation and then interest rates, can have a significant impact for some people
Mortgage rates are being predicted to be over 5% by the end of the year. We are facing a cost-of-living crisis so this sharp increase to interest rates will mean our spending power is reduced further. For those who stretched themselves financially when they purchased a home, may find themselves with some large increases to repayments and potentially have some difficulty with making them

There are Things YOU can do

This can be a stressful time for many but there are some things which are within your control you can action to help combat some of the affects of rising inflation and interest rates. Cutting back on your expenditure and the ‘nice to have’ purchases where you can, will help. Plus, the current climate means there’s a real labour shortage of good skilled workers, so now might be a good time to have that chat to your manager about a pay rise. As we mentioned at the beginning, we haven’t been in this economic situation for 30 years, so there’s a good chance you’ve never experienced this climate while having a mortgage. If you have any concerns or questions, we recommend talking to a financial adviser about your mortgage and your situation.

We have a team of financial advisers who can help in this area. We’re always available for a chat.