Prepare Your Home Loan For A Recession

Recession is on the cards, so it’s time to prepare. Here’s what you should know.

Posted May 2023

Two women discussing their finances

If you feel vulnerable in the current economic climate, you're not alone. Many New Zealanders are feeling the pinch of the rising cost of living. As the world recovers from the COVID-19 pandemic, the economic repercussions are being felt across the globe.  

It's no secret that a recession is on the cards.

Adding to our financial pressure, OCR (Official Cash Rate) hikes are pushing interest rates higher and higher. Which is why there's never been a better time to recession-proof your home loan.

That's where Unity comes in. We're here to help our members in any way we can. Whether it's through new lending, refinancing your home loan, increasing savings, or maximising your investments, we’ll help you manage your finances and prepare for whatever the future holds.

In this guide, we'll take a look at:

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Do home loan interest rates go up in a recession?

New Zealand's OCR is the highest it's been since the Global Financial Crisis in 2008. When the Reserve Bank raises the OCR, it impacts banks' costs. Banks then have to cover these costs by raising their interest rates

We need a recession to help slow down the economy and reduce borrowing demand which will stabilise interest rates. However, the financial strain that a recession brings can inhibit our ability to make home loan repayments.

Would a recession lower house prices?

You may have already noticed the substantial drop in house prices. This happens during a recession. As interest rates rise, along with the everyday cost of living, we become more careful with our spending and the demand for property slows.

While property prices are down, the cost of financing a home loan is higher due to rising interest rates. It’s important to consider the cost of a home loan if you’re thinking of investing in property.

Recession Image 2

Is it harder to get a mortgage in a recession?

It’s common for lenders to increase their requirements during a recession (whether it's your first or not), making it harder to secure a mortgage. We all want to reduce our risk during a recession, and lenders are no different. Lenders want to ensure you have the means to service a mortgage despite the recession and interest rates.

At Unity, we make our application process as easy as possible. We outline the information you’ll need to provide in our home loan application here. You can apply for a home loan through our website. If you need help, we’re only a phone call away.

How do I protect myself and my home loan during a recession?

We know these are challenging times. Here we share some tips for staying on top of your finances when things are tight.  

Review your budget and expenses

Your budget will help to guide you through the recession. Creating a budget is often a work in progress. You might not think of all your incomings and outgoings straight away. However, major expenses such as home loan repayments, groceries and utility bills should be loaded in first.

An easy way to keep track of your expenses is through a budgeting app or spreadsheet.

You can download our budget planner here.

Of course, the trusty spreadsheet is still a great budgeting tool!

Realistic budget

Review your home loan repayment frequency

It's a good idea to review your home loan repayment frequency to ensure that it's aligned with your financial goals. Consider repaying your home loan as frequently as possible (such as weekly rather than monthly). This will assist you in paying your loan off faster and save on interest costs in the long term.

Consider fixing your home loan

To increase your financial certainty, consider fixing your home loan. A fixed home loan means your home loan repayments won't change, even if interest rates rise during your fixed term. At the end of the term, you can choose to refix for a new term or move to a floating (variable) rate.

Fixed home loan repayments make it easier to stick to your budget. Our fixed terms range from 6-24 months - check out our current interest rates.

Consider refinancing your home loan

Another way to recession-proof your home loan is to consider refinancing. A small change in interest rates can significantly impact your home loan repayments.

Talk to us about refinancing your home loan. If we can secure a lower interest rate for you, we will. The lower your interest rate, the more cash you can save or put towards other expenses. 

Communicate with your lender

At Unity our goal is to help our members, and this includes during times of hardship. By discussing your situation with your lender you may find there are better options available to help you during a recession. Some options Unity can offer include loan modifications, loan term changes, repayment frequency options or payment deferrals. Open communication can help both you and the lender.

Prioritise debt repayment

It's always important to focus on paying down high-interest debt first, but during a recession, it can be crucial. By paying high-interest debt, you can help to free up more of your income in the medium term. The highest interest rates often include credit card debt, Buy Now Pay Later, and payday lender loans.

Create an emergency fund

An emergency fund is critical in a recession. We're all prone to unexpected costs. Vet bills, car issues, dental treatments - these things can catch us off-guard. An emergency fund helps you cover these when they arise.

So, how much should be in your emergency fund? We suggest saving at least three months' worth of living expenses. Having this money available gives you a financial safety net when you need it most.

Here are a few tips on building an emergency fund:

  • Set a goal
  • Add your emergency fund contributions to your budget
  • Set up an automatic payment
  • Keep track of your progress
  • Don't stop saving after you reach your goal

With an emergency fund, you'll always be ready for the unexpected.

Explore investment options

With a potential recession on the horizon, it's important to explore investment opportunities.

Investments can be daunting but can also set you up for a bright financial future. With the right investment, you can become home loan free much sooner than expected. 

Before you invest, speak to a financial advisor to discuss your best investment options. A financial advisor will provide the best recession-resistant investment options. They'll also make sure investments align with your risk tolerance. 

Don't feel like it's a good time to take a risk? We get it. Our term deposits are typically considered a safer choice when compared with other options. Talk to us about opening up a term deposit and start growing your savings.

Let us help you prepare

With the rising cost of living, we're all feeling the pinch. Recession-proofing your home loan increases your financial security as you navigate this economic uncertainty. 

We can't ignore the signs of an impending recession, but we can prepare.

We still have a long way to go before we're out of the woods. Take steps to protect yourself and your home loan and reduce your financial stress. As always, if you have any questions or concerns, the Unity team is here to help.

Let's get through this tough time together.

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The article published on this page is not financial advice and should not be relied upon as such. The opinions published in this article is not those of Unity Credit Union.