We are entering an unprecedented time. The Reserve Bank has announced an Official Cash Rate increase from the historic low of 0.25% up to 2%. Some economists expect a recession to occur which can lead to a loss in business confidence.
Article current as at 9 June 2022.
What does a recession mean for home owners?
The key problem in a recession is the lack of business confidence. Business owners lose clients and either downscale or freeze hiring. If you are a business owner, you need funds to ride through the storm. If you are an employee, you need funds to allow for redundancies or any other loss of income.
What’s different about this recession?
If you cast your mind back to the dark days of 2008, the sudden and unforeseen collapse of Lehman Brothers (amongst others) triggered a recession in the US that spread across the world. This time, however, the trigger seems to be the after-effects of nurturing the economy through Covid. The difference, therefore, is that this is a much slower-moving event and we have time to prepare for what is in store.
3 things you can do to prepare for a recession
1: Minimise your luxury spending
When things are going well, it is easy to spend money on luxury items. While cutting back on these expenses is exactly what causes a recession (a recession is just a reduction in spending in the economy), now’s not the time to take one for the team. What are you spending money on that you don’t need? Today is the day to sit down and complete a budget (we love PocketSmith for this).
Today is the day to sit down and complete a budget
2: Restructure your mortgage
Usually, a mortgage is a “set and forget” arrangement; at least until your fixed rates are due for renewal. But with uncertainty in the economy, you want to make sure your mortgage is setup if the worst should happen. Too many people had bad Credit Reports in 2008-2010 from not being able to pay their debts (either Credit Card or mortgage). But this time around, we have a warning and we can prepare our mortgages for a downturn.
Contact your local Adviser to talk about a recession-proof mortgage structure
3: Think about your non-mortgage debts
It’s definitely time to review your Secondary Debts and there are a number of things you could consider:
- Consolidating your debts so that your regular payments are smaller (your Mortgage Lab Adviser can help guide you through this)
- Using some spare cash (not all of it) to pay off any high-interest secondary debts (which will free up some of your income to use)
- If you have a small Student Loan remaining, consider paying it off which will mean more in your regular paycheck. For more on this, we have just released a blog talking about Student Loans and how they affect your income.
The goal of restructuring or removing your Secondary Debt is to increase the amount of available income that you have. You can use this income to build up a buffer in your cash savings or your mortgage.
1 thing you definitely shouldn’t do in a recession
Unless you are preparing to buy a home in the next 6 months (or over 65 years old and looking to retire), it would be extremely unwise to move your KiwiSaver into a more conservative fund. The markets have already come back from their highs so any transfer to a Cash Fund now locks in those losses. And it’s almost guaranteed that you won’t pick the bottom of the market – even the best Fund Managers miss the turn – so you will miss out on potential profits later.
On average, markets jump by 28% the year after a major crash. This is part of the roller-coaster of investment and not a time to exit.
Do it today. Prepare, don’t panic
- Complete a budget and remove luxury expenses
- Talk to someone about your mortgage and make sure it can see you through a downturn
- Look at your secondary debt and get them under control
Mortgage Lab’s mission is to be the digital town square for financial decision-makers to gain knowledge about their current and future mortgage. Follow us on Facebook and LinkedIn or subscribe to our newsletter to be notified of our latest articles.
The post Prepare, Don’t Panic – 3 things to do right now to prepare for a recession (and 1 thing you shouldn’t) appeared first on Mortgage Brokers - Mortgage Lab.
