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Happy New Year!
Fixed rate expiring soon - wondering what to do?
You have to always consider your individual circumstances when making decisions around which fixed rate term is best for you. With that disclaimer out of the way, I am very reluctant now about suggesting fixed rates anything longer than 6 months to 1 yr at the moment. You will be taking a risk either way, but if it was me, I’d actually go on floating. Keep in mind that I assume most people are after the cheapest average rate over the term of your mortgage. As an example, the floating is around 5.75%ish right now (I say ish because every bank is slightly different and they all discount a little bit here and there) – compare this with 7.5%ish for a 2 yr fixed rate. In order to making fixing for 2 yrs worth it, the floating rate would have to be higher than 9.25% for 50% of the time. Even though it is likely that floating rates may rise from mid this year, do you really think it will rise this high, this fast?
When you stand back at look at it all – it’s a question of this: How much are you willing to pay for certainty of payments on your mortgage? Fixed rates should be higher than floating rates – it makes sense to pay for certainty, so perhaps floating is the new fix for 2010.
Update on Kiwibank experiment:
About 1 month ago, I submitted an application with Kiwibank for a 90% loan pre-approval to purchase an additional property. I had two purposes in mind by doing this: Firstly, I wanted to experience what the general public goes through in order to obtain a loan through this lender (as Kiwibank do not currently use mortgage advisers, you have to approach them directly). Secondly, I wanted to test out their “Lowest Cost” Home Loan Guarantee, to see how it would compare with my own banks, ASB and Westpac. As I believe it is actually a great time to get in the market (if you can), I will actually be casually looking to purchase a property using this approval.
November 26/2009: I have filled in an application form from Kiwibank’s website, and have submitted this, along with the supporting documents I suspect they will require (bank statements and confirmation of my income).
December 2/2009: It took about 6 days for Kiwibank to get back to me - I actually think this is not too bad, in light of the fact you need to allow 2 days postage - so let’s say the response has been 4 days. It would take me about 1 day through a mortgage broker (myself), but I will reserve my judgment for now. The loan assessor I am dealing with is named Simon - very nice young chap who spoke English very clearly and was able to answer all my questions - he is sending through a list of additional information I needed in order to get an approval - here is the list:
- 3 months most recent transactional statements for your main bank account/s
- 3 months most recent home loan statements for each home loan
- 3 months most recent credit card statements for your credit cards
- Financial statements for years ending 2008 and 2009 for your company
- Consecutive payslips for your partner
- Copy of Drivers licence or passport for each of you.
- Evidence of your deposit and that it is saved.
December 7/2009: As you can see, it took me a few days to get all the supporting information together. After trying several times to fax Kiwibank (phone line was busy the whole morning -must be a popular fax!), I eventually gave up and scanned and emailed the supporting information off.
Some background on my application: I have requested a loan pre-approval of $630k to secure a property to be purchased for $700k. I personally would be frightened of borrowing this amount as we already own 3 properties currently, but I work this out as being the maximum that we could afford.
December 17/2009: I received another email from Simon at Kiwibank today asking for further information still - this time, they want to see evidence that I do not use one of my credit cards, more bank statements and they want to see repayment history on a vehicle lease that I have. I have sent all of the statements off today that I could, but as I do not use the credit card anymore, I usually just throw out the statements - I will have to find time to cue at BNZ to get the card statements.
December 18/2009: I must say, Simon from Kiwibank is very helpful, but unfortunately he rang today with some bad news.
Due to the fact that I made some voluntary donations last year, they have to take into account the possibility that I may commit this terrible act again, and are counting my historical donations as a future fixed financial commitment - something which it is clearly not (I have never come across this problem in all my 7 years of being a mortgage adviser with any other lender). Rules are rules however and not every bank is similar, which is a good thing! After discussing this with Simon, I agreed that the loan application be altered somewhat to a lower purchase price scenario, one where we would purchase a property for only $477k and we would borrow 90% of this = loan amount of around $430k. Will keep you posted…
January 11 2010: I received another call from Simon today with some more unfortunate news. Due to fact that I owned other property and had lending around 80% on these properties, they were unable to approve anything whatsoever. So, even though the other properties were not used as security with Kiwibank, they still had to take this into consideration. Income was not an issue but the donations were unfortunately, and as mentioned previously, this is a rather odd policy to have indeed. On the application from the 26th of November, they could see plainly all these facts, but unfortunately it took them almost a month in coming to this conclusion.
Summary
So in the final analysis:
The good things about Kiwibank - They are government owned (assuming that is good); I have heard that their internet banking is actually quite good; their customer service is quite friendly on the phone (at least in my experience as a new customer); They have 30 yr loan terms at 90% (something that the other lenders do not have).
The bad things about Kiwibank - at 90% lending, they will charge a low equity fee of 2.1% (apart from this being around double of other banks, it makes their promise of ‘lowest overall cost home loan’ very misleading. Their credit policy is incredibly difficult. They are slow to respond to applications (taking out my time delays in getting information to them, they took almost a month.
Other options:
ASB
A low equity fee of around 1% would apply instead of 2.1% with Kiwibank. The other catch is that as the lending is over 80%, they will require me to reduce my overall borrowing to 80% within 5 yrs. This is not ideal, but if I have to pay a lot in mortgage payments, I’d rather it be towards a principle repayment and not towards a whopping big low equity fee!
Westpac
They do not have low equity fees with Westpac, but do charge an LEM (low equity margin) of .50% which is an additional margin, added to the advertised interest rate chosen. At first, it sounds like a lot, but in the long run this will be cheaper due to fact that as soon as property increases in value or my lending reduces, this margin disappears.
My Choice
If I do purchase a new property, I will fund it through Westpac. This is due to the low equity margin and the fact that that with ASB, the low equity fee would be charged on a rather large sum of debt. This is not to say that Westpac is the best lender, but that in this instance, they are right for us.
Upon reflection, if Kiwibank would have approved this loan, they still would have been a possible option even though they were most expensive by a long shot - this is due to fact that the loan repayment term could be up to 30 yrs at 90% - something which at this stage, is not possible with the other lenders. The question would then become , how important is it to own a property and am I willing to throw away a huge amount of cash in the form of a fee for the benefit of receiving some capital gains (which may or may not be taxed in the future) - I’m not so sure…
If you are in the market for a home loan, it means that quite likely you are getting what you want for Christmas - a new home! Why not use this as an opportunity to assist some people in Auckland who are not not as fortunate as you are?
Between 1st of November and 25th of December, for any new loan that is settled through us, we will donate $250 to the Auckland City Mission in your name. Better yet, if you know of anyone in the market for a mortgage, refer them on to me! Click here for more information on the Auckland City Mission http://www.aucklandcitymission.org.nz/. If you would like to donate some funds to this organisation regardless, please do so by going here: http://www.aucklandcitymission.org.nz/donate.htm
An experiement with Kiwibank…
Kiwibank has done a fantastic job in convincing the Kiwi public that they are the cheapest, the most Kiwi and the most honest bank in NZ. As a mortgage adviser, I hear some stories from Kiwibank customers from time to time that makes me think. I’ve heard that their break fees are one of the highest (if not the highest) amongst all banks in NZ. More importantly than this however, is a trend that I am seeing amongst borrowers, who transfer their lending over to Kiwibank, only to get fed up with the level of customer service and transfer back to one of the bigger (so called Aussie) banks.
I personally like the idea of a locally owned bank. My only concern with Kiwibank is that it is implying that it is the cheapest option for home loan customers. If the break fees are the highest amongst all the other banks, then advertising the cheapest home loan in the market is actually very misleading - a fact the press has not picked up for some curious reason.
Still, I want to give Kiwibank the benefit of the doubt. I currently bank with ASB and with Westpac for my lending and am toying with the idea of buying another property. I know what the response will be from these two lenders if I approach them, but I wonder what the response would be from Kiwibank - I’m going to find out. As of today (November 26/2009), I have filled in an application form from Kiwibank’s website, and have submitted this, along with the supporting documents I suspect they will require (bank statements and confirmation of my income). Will keep you posted…
Update December 2/2009
I was only thinking this morning - “I wonder what the heck is going on with my application and why I have not heard back from anyone!” - only to be very pleasantly surprised by Simon on the phone from Kiwibank, at 1:50pm today. It took about 6 days for them to get back to me - I actually think that is not too bad, in light of the fact you need to allow 2 days postal time - so let’s say the response has been 4 days. It would take me about 1 day through a mortgage broker (myself), but I will reserve my judgement for now. Anyway, back to Simon - very nice young chap who spoke English very clearly and was able to answer all my questions - he is sending through a list of additional information I need to provide in order to get an approval (income confirmation etc). Will keep you posted…
What’s happening with the interest rates?
The official cash rate (OCR) was reviewed a couple of weeks ago and it was not changed. The reserve bank governer indicated that the rate would stay where it was still until mid next year before possibly increasing. The risk he faces is that the housing market could get out of hand again - the other risk that he faces is that increasing the rate would push up our dollar even more - damaging to exporters. Whilst some people are saying that the fact that the low official cash rate may spur on another housing boom ( http://www.goodreturns.co.nz/article/976495848/bollard-s-low-ocr-likely-to-refire-housing-market.html ), I’m not so sure.
There are three things that affect the demand of money - the price and the supply. Firstly, the price of money influences the demand - the lower interest rates are, the more people want to borrow, the more they pay for house and the cycle goes upward. Secondly, the availability of money also influences demand. If there is not money to lend due to say, lack of world wide credit, then this could push up the price of money, and in turn decrease demand. The third thing involved here however, is the banks criteria. They cannot drop rates any lower due to competition, but they can make it more difficult to borrow - this is exactly what is happening right now. If you were borrowing over 80%, doing a contruction project or major renovation, or you are self-employed, getting a mortgage right now is extremely difficult.
What I am saying is that the free market in this instances, is self regulating the housing market. The credit crunch has forced lenders to make their criteria incredibly tough for borrowers. This factor, combined with higher fixed rates (again, caused by the credit crunch) is causing the banks to limit how much cash they pump into the economy. What this means for you and me is that it is not as easy to do renovations, buy a new boat or car and put in on the house, or buy multiple investment properties. It has almost nothing to do with the OCR.
There is one other thing that I have been made aware of this week also - the reserve bank governer has more levers than just adjusting the OCR. There is a thing called the “core funding ratio” (see http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10609289 ). This is set to increase shortly and what this means is that there will be an extra requirement on our banks to to ensure that they have liabilities (term deposits held on behalf of customers etc) to match its assets (primarily, its mortgages). This could heat things up even more in the space around competing for your savings accounts as banks will have to hold as cash deposits a very large % of what they lend out.
Interest Rate Strategy:
Always a popular question and always a changing but equally vague answer I give.
When determining the best loan structure, you need to take into consideration 1) your income stream (pay rises, lump sum bonuses, job changes) and also 2) your lifestyle (thinking of having kids and going down to one income or doing a renovation?). If you think your income is going up, make sure that if you opt for all of your lending you have the ability to increase your payments without penalty. Most banks have this option where you can increase your repayments.
By far one of the biggest trends I am seeing at the moment is the trend to go for floating rate homes loans. I believe it is more of a case of ‘choose the cheapest rate’ over anything else. There is good method in this madness however - ie., go on floating is not always a bad thing and in the next 2 yrs, my money is on the floating rate being cheaper than the current 2 yr fixed rate. As always though - best to seek some advice when deciding what to do next in this area.
When will interest rates go up in New Zealand?
When I make reference to interest rates here, I am referring to the official cash rate set by the reserve bank - in New Zealand this is currently at 2.5%. The official cash rate (OCR) has a strong influence on the floating rates and also on the short term fixed rates such as the 6 month fixed rate.
The Reserve Bank of Australia (the RBA) surprised the markets on Tuesday of this week by increasing the overnight cash rate by a quarter of a percent from 3.0% to 3.25%. They are the first central bank in the world to start tightening and increasing their rates. It has led to an increase in mortgage rates across the Tasman. With the Australian economy showing signs of improving, the RBA felt that it was wise to take the foot off the gas pedal a little when it comes to stoking up the economy. On a positive note, it should slow down our currency’s appreciation against the Australian currency. I would expect though that the U.S. dollar will continue to decline slowly but surely which will have a balancing effect. Australia has higher wholesale rates than New Zealand, which is historically unusual. Their rate is 3.25% against our 2.5%.
So due to the state of our economy, our official cash rate is unlikely to go up until the middle of next year at the earliest would be my best guess.
Interesting stats on Ponsonby house prices…
In the 4th quarter of 2007, the median house prices peaked at $770k in the greater Ponsonby area. The median house price decreased by 14.3% to $660k in the 3rd quarter of 2008 - this was the lowest point. In the this current quarter, the house price median is up to $760k - note that this is only 1.3% off the peak in late 2007 and a massive 15.1% increase above the trough of late 2008
It should be noted however that this area is not an accurate picture of the entire NZ housing market and definitely not a good gaugeto determine if we are out of the woods yet with the NZ economy - but it’s confirmation that if you buy quality property in quality area, you can’t really go wrong for long!
The death of the U.S. dollar
This is possibly one of the area’s which I have been quite interested in for some time now - I believe very strongly that the US economy is dying and so is the U.S. dollar - expect to see more comment from me about this in the future
Former Federal Reserve Chairman Alan Greenspan said in September 2007 that the euro could replace the U.S. dollar as the world’s primary reserve currency. The Euro could quite likely replace the dollar very soon as the most popular reserve currency at pressure mounts from many Arab countries, Asia and Russia to dump the USD as the currency that is used to base oil trading on. This will and is, having a massive impact on the world economy right now. In little old NZ., unless there is a second stage to this world recession that we are in (and there likely is by the way), our dollar should in theory, continue to rise based on the falling US dollar.
Have a read of this article - http://en.wikipedia.org/wiki/Reserve_currency
What does this mean for N.Z. - I don’t actually know sorry! But one thing I do know: I’m glad to be living and working in NZ. As the location for the world’s super power shifts Eastward, we are on the back door to the next major world super power - China. The agricultural industry is in prime position - we don’t have the mineral resources that Australia has but we have other things to offer than just pineapple lumps!
In summary…
Due mostly to some lingering uncertainty with regards to coming out of the recession, I feel rates (short term fixed and floating) will likely stay low for at least another year. Property prices have definitely bounced back and those waiting for the trough in the market have already missed out. Good news however though if you are still looking to get in the market: N.Z., even though small and very isolated, is poised for huge growth as Asia becomes the new economic epicentre.
Floating vs Fixed - Paradigm shift arriving slowly but surely
Whether or not there is a mastermind behind this one or not, there are multiple factors which will influence NZ borrowers towards choosing a floating rate home loan vs fixed.
Currently you can find a floating home loan for 5.75% or even less in some cases. Compare this to the ever popular 2 yr fixed rate which is currently around 6.75% (or as high as 8.60% for a 5 yr). If all the indicators point to a low floating rate home loan for the next 2 yrs at least, why not consider letting your home loan float along instead of fixing it? Here’s an example: If (and there is always an if!) the floating stays around 5.75% for the next year at the very least, it would actually have to rise to 7.75% in 1 yrs time and stay there for another year, in order to make it the same cost as a 2 yr fixed rate. If you understand the simple mathematics behind that calculation, then you will see very quickly how ridiculous fixing for longer than 2 yrs at the moment is. Now this is just focussing on rates, which I always say is a big ’no-no’ - with floating rate home loans especially, there is much more to it than the rate:
- there is no break fee penalities as you are not repaying a fixed rate
- there is no problem in converting it to a fixed rate later on
- they are usually very easy to make wee lump sum payments on
- there are also “capped rates” with some lenders, where the loan is floating, but capped at a level for safety
- lenders may also be introduing true “offset” mortgage account facilities soon
If it was me, I would float, but I would also ‘overpay’ my mortgage slightly so that when the rates rise again, I can increase my loan term to absorb that shock - please read previous blog regarding “The Interest Rate Shock Absorber” for more info on this.
House Prices Back Up Again
According to QV Valuations, house prices are climbing back towards last year’s levels, after four months of increasing sales values. The national average sale price for August (New Zealand wide) was $385,426, only 2.8% below the same period last year. The main reason for this recovery is the shortage of stock and the demand for properties which is reasonably good. Again QV Valuations note that this is a surge rather than start of a boom. The Auckland market is recovering as well - the average sale price for August was $564,319, only 1.8% off the corresponding figure from August last year. (source:James Lockie at General Finance Limited)
Interest Rates
The Governor of the Reserve Bank announced no change yesterday to the Official Cash Rate (OCR). This was not unexpected. Wholesale interest rates are at an historic low, so any further easing is most unlikely. The only real reason to lower interest rates further, would be if our currency appreciates too much. Our currency has been appreciating against all the other main currencies but according to the Reserve Bank, it is still at manageable levels. The comments made by the Reserve Bank yesterday are revealing and informative. They are saying the decline in economic activity is coming to an end and a patchy recovery is underway. They note however that the medium term outlook remains weak. Inflation is not a worry – this is positive for the lower interest rate regime. They expect short term interest rates (especially floating) to remain at their current levels for at least a year. This is a more positive outlook than six or twelve months ago. (source: James Lockie at General Finance Limited)
Do you know anyone who is house-hunting at the moment?
We are finding there there are plenty of people looking to buy but are being told ‘no’ from there bank for multiple reasons. As we deal with multiple lenders, we are often able to turn a ‘no’ in a ‘yes’. Our business success is based on people referring other people to us - if you know of anyone who could benefit from our services, please click here: http://ungaro.co.nz/testimonials/referrals/
Thanks for reading!
If you want to know where the housing market is at - check out some open homes. At the moment, especially in Ponsonby and Grey Lynn in Auckland, there are HUGE crowds at open homes - that says something! Perhaps this is due to a few reasons 1) In uncertain times there is a flight to quality 2) There is a severe shortage of properties for sale as vendors who may have previously been under financial pressure, are surviving much better largely thanks to lower interest rates. 3) The media has been hugely influential when times were getting tough, and are now equally over the top on reports that the market is rebounding (some reports say there will be an increase in property values by up to 30% in the coming few years - http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10590127).
So if we are out of the woods, is it a good time to buy? My point of view on timing is that…forget timing, any time is a good time - just get in there and stay there. Property purchases should not be viewed of as share/investment purchases. You are purchasing either a home or a rental property. If you are purchasing a home, timing doesn’t matter. If you are purchasing a rental, its not the timing, it’s the ‘time-in’ the market that matters most.
So get into the market, stay there, and don’t put too much of your security in your home even if it is your biggest asset. I often here comments like, ‘we can always sell our property if we have to’ etc. At the moment, as long as your source of income is secure, you are going to be safe. Ironcially, people are taking out income protection at record levels (http://www.nzherald.co.nz/surviving-the-recession/news/article.cfm?c_id=1502812&objectid=10588257) to insure against job loss. Statistically however, you are still way more likely to be off work due to illness than you are due to redundancy. Ideally you never want to be in a position where to have to sell your home - for what it costs, get mortgage repayment insurance so you dont have to go there and be forced to sell in a poor market due to ill health.
Where to with interest rates? With regards to the official cash rate in New Zealand, this is at record lows already, but due to the strength in the Kiwi dollar and the damage this will cause to our export sector, the reserve bank governor is signalling further cuts - read more here: http://www.goodreturns.co.nz/article/976495433/bollard-keeps-ocr-steady-but-flags-further-cuts.html. I personally feel that a rising NZ dollar and a decreasing US is inevitable for reasons I can’t go into (like there is not enough space here - buy my book!)
As far as a re-fixing strategy goes,talk to an adviser about this for your specific needs. My personal strategy however, is to fix for short-terms only at the moment. This is because longer term rates are already very expensive (i’ve missed the boat) and short-term rates are likely to stay low for quite some time (refer to above article from Herald). If you do fix for a short term, consider this interest rate insurance strategy- I call it the Interest Rate Shock Absorber:
Instead of $400k fixed at 8.3% for 5 yrs over 30 yrs = $3,019/month…
Fix $400k at 5.5% for 1 yr over 17 yrs instead = $3,022/month
In summary, take advantage of the lower rate by repaying as much principle as you possibly can whilst rates are low. When rates eventually increase again, adjust your loan term so your payments stay constant (and affordable). Its a good way to plan for the inevitable, but still enjoy the low rates that are available today
Hope you’ve found this useful 
Not too long ago, the OCR (official cash rate) was hiked several times in a row in an attempt to ‘cool down’ and booming economy. The theory is, increase the OCR, which affects the amount that banks have to pay for the funds they borrow, and this will get passed on to consumers - higher interest rates takes $$ out of the consumers’ pockets and therefore less cash in circulation - this decreases inflationary pressures. Unfortunately this did not work: Every time the reserve bank governor increased the OCR, the floating rate at banks increased, but will still saw incredibly low fixed rates during this period - why? Because most fixed rates were sourced offshore
Now we are seeing the exact opposite. The reserve bank governor is decreasing the cash rate to record lows, but this is not being passed on. So does the OCR have any impact at all on the rates that we pay at the banks?
I think the answer is somewhere in between - banks are making huge margins at the moment by not passing these savings on, but their risks are higher also in this environment so are they not entitled to a higher return for taking the risk? (I’m not siding with the banks though in asking this) Also, there is something else going on which makes it difficult for banks to drop their rates - the rate of return that they pay out on savings and investments at the moment is unnaturally high and therefore they can’t lend on lower rates that what are currently on offer as their funding sources are much more complex. There is a lack of supply of funds, as you may or may not be aware, we are in a credit crunch -in other words, the banks need to compete for our term deposits. It was not that long ago that banks were competing on mortgage rates, now they are competing on savings rates. Read the rest of this entry »
Break Fees for Dummies
Buried deep, deep inside your loan document will likely be something that explains how a break fee is calculated and why. the break fee is determined by the size of you mortgage, how far interest rates have fallen since it was fixed, and its remaining fixed term when it is repaid. Some lenders base this calculation on the advertised current rate and other lenders (like ANZ, Westpac and Kiwibank) calculate this based on the current cost of funds - and can therefore be higher.
The break fee can be extremely difficult to work out - best not to try, but simply call your bank and they will provide a quick quote as to what this fee will cost. I have seen a break fee recently of $500 and have also seen one at a mere $85k for a $450k mortgage - massive!
As a general rule, you won’t financially benefit from breaking fixed rates and refinancing when interest rates are falling. The break fee will usually offset any reduction in interest paid. However, there are some exceptions to this rule and it is best to think things through carefully - especially if you may be selling a property and be faced with the repayment of your mortgage (and breaking of fixed rate) regardless.
In order to determine if you should break your mortgage:
- get a quote from your lender on what the break fee would be
- Visit this site and use the calculator to decide if it is worth it http://www.brokerchat.org.nz/calculators/break-cost-calculator
Other things to be aware of
If you are selling or thinking of selling…
Potentially it would be wise to break your mortgage now (ie convert your fixed rate to floating). This way, you would be certain as to what your fee would be BEFORE you sell - no alarms and no surprises!
If your mortgage is on an Investment Property…
Your break fee will be tax deductible. Breaking the mortgage can be a good way of bringing forward tax losses. The lower rates also gives your property a better chance of becoming cash flow positive.
Remember these two things:
- do not get too fixated on interest rates - it’s like chasing the wind! If you can afford the current payments on your mortgage, perhaps consider just putting up with it - next time you get a fixed rate loan though, talk with an adviser before you commit to anything and therefore reduce the chance of getting it wrong next time around around.
- If your payments drop due to falling interest rates (because of breaking it or otherwise) - keep your payments constant. It’s not the rate that you pay but the rate at which you repay that determines your overall interest cost - $50/month more on your mortgage will save you thousands - 0.10% discount off your rate will save you only $100’s.
If you have never received advice with regards to your mortgage structure and are considering re-structuring your existing lending - talk to us about a mortgage plan - Working with your budget, we will advise you on the most optimal loan structure to repay your mortgage as fast as possible,which could save you hundred’s of thousand’s in interest - a fee applies for this service