Ungaro&Co

Happy New Year!

January 22nd, 2010

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 26^th 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…