Higher mortgage rates - are you prepared?

If you’re on a floating mortgage at the moment you’ll be loving the rates currently on offer – which range from 5.69% to 6.45%.

But commentators are warning that floating rates might not stay this low for long:

…rates have averaged about 8 per cent in the previous decade, and homeowners must assume they will be nudging 10 per cent in the next five to 10 years.
- Bernard Hickey in the NZ Herald, 12/09/09

What one should do is use the next 6-9 months to pay off as much principal as possible before the floating rates start rising, and budget for the current rates rising at least 3 percent by early 2012.
- BNZ’s Tony Alexander in Stuff, 30/09/09

Next year interest rates are going to rise some economists are saying by 3 percent. Buyers who could not absorb this should bide their time and save.
- Kieran Trass in the NZ Herald, 06/09/09

So if they’ve all got it right, a good plan (as well as paying as much as possible off your mortgage) would be to make sure that your budget can cope with an increase of 2-3 percent from current levels. Whether you decide to stay floating or shift to a higher fixed rate.

For example, using Sorted's Mortgage repayment calculator, at 5.69%, $300,000 borrowed over 25 years costs $865 a fortnight to service.

But at 8.69%, repayments blow out to $1,132 a fortnight – an increase of over $500 a month.

Could your budget cope with that kind of increase in mortgage repayments?