As you can appreciate, at this time we’re currently experiencing a high volume of questions. They all have a similar sound to them so to save time, here’s a list to cover off some of the FAQ’s around Covid-19. If you’re curiosity persists, please do get in touch.
For an extra insight, I’m happy to be able to share a recording with a client made on 18/03/2020 on this topic.
Like many self-employed, small business owners, I’m not interested in contributing more to an over-abundance of commentary on an event that I wish wasn’t happening at all.
So here’s my ‘broken-record’ summary of a hundred or so conversations had this week, from people, who are justifiably concerned about current events. In this article I want to cover off some common Covid-19 questions all centred around mortgages and property.
Should I still go through with selling and buying a home?
Remember that whatever affects a purchaser affects a vendor, if a sale occurs in the same type of market. Worst case, you take a hit on your current home by say, 10%. The seller on your next property is also selling at a 10% discount. If upgrading, you’re giving away a discount which is less than the discount you receive – you’re winning! In fact, you should always upgrade in a downward market… if you can find one.
There are added complications around the process of buying and selling right now, specifically open homes. Real estate agents now more than ever, will prove their worth by implementing new and creative ways to get the job done.
The property market could crash – what should I do with my rental property (ies)?
What would you normally do? I suspect you would hope that in the long term, the value of your investments would continue to increase, and in the short term, your tenants will continue to pay their rent.
Apart from paying real estate commission and potentially break fees on your mortgage should you sell, you could lose by ‘selling into fear’ right now. Ideally, you don’t want to sell under pressure and fuelled by emotion, or you risk liquidating an asset at any price.
There are several floors of support that underpin the property market, and the one most over-looked and under-estimated is interest rates. The cheaper they get, the fewer people have to sell, and the more people want to buy.
If you can, you should hang on, just like this client, who shares his story as it’s unfolding in this podcast episode.
I hear interest rates are dropping – should I break my mortgage?
Understandably, you see rates dropping, you don’t want to miss out. Here’s the thing to keep in mind here: The break fee is calculated on wholesale costs, and because these have decreased significantly, your break fees may have increased very recently. Structurally, it’s going to be hard for fixed rates to fall much below 3%, not without some unconventional moves by the central bank. Specifically we’re looking for more quantitative easing from the reserve bank and ideally, some sort of mortgage-backed security sale initiative, in order to inject further cash into the banking system.
Here’s an idea though: If you break your [now] expensive fixed-rate right now, add the break fee to your mortgage, and sit on a floating rate for a bit, there could be a strategy in waiting for that dip in home loan rates below 3%. It can be risky standing around with a floating rate mortgage and not normally advisable – but we’re in unusual times. If you need to decrease your expenses, and you’re okay with sacrificing your balance sheet to do it, maybe it’s okay for you?
I have savings in the bank…will it be taken away?
Logically, the bank wants you to survive this difficult time. You may be a contractor or a self-employed individual staring down a very dry pipeline of work. This is hard, especially when those in power who are dishing out ‘stimulus’, have no idea how small business works. (tax relief, not benefits please!!). There are a lot of people in your situation (which as comforting as it is, doesn’t make the worry go away I know!). Banks are aligned with your interests here however. You don’t want to lose your home, and they don’t want you to stop paying your mortgage.
Now, if you have savings in your bank, don’t panic that they will take it away from you. Even if it was technically a risk, now is not the time they will need to resort to this – they have WAY bigger friends than you and me. Using up savings to get through tough times is exactly what savings are for.
I have available funds in my revolving line of credit facility…will it be taken away?
So let’s talk about available funds sitting in a revolving line of credit facility (examples include Flexi, Orbit, Choices Everyday or Rapid Repay). Many borrowers use this as an efficient way to store surplus cash, so again, the logic above would apply here also – why would banks take away a tool that can help you get through a tough period of time? Revolving line of credit facilities are a bit different though, as the banks can review these limits periodically at their discretion. Concerned? What about drawing down some funds from your revolving line of credit and deposit it into a savings account? Well, you’re jumping out of the frying pan into another frying pan. The same risks you face with savings accounts, you face with revolving line of credit facilities.
To be honest, the only way to keep your cash safe [from the banks] would be to withdraw some or all of the funds and convert it to physical cash, cryptocurrencies or physical, precious metals. Now you’ve fallen out of the frying pan, straight into the fire here, so be careful. Like changing your KiwiSaver fund right now, this could be very, very risky. If you have any questions or concerns around your savings account or your revolving line of credit facility (if you have one), then please contact your bank directly – they are truly here to help.
I’ll repeat it for clarity, the banks’ interests, and your interests, are very much aligned right now. Regulators are also easing up on the banks – all in the name of making things as easy as possible during a difficult time.
I hope you get through this time okay and it’s not as bad as it currently appears. Banks can assess applications to top up your mortgage, convert your mortgage to interest only, or go on a loan repayment holiday. It pays to think ahead, but keep in mind banks are currently inundated by a lot of queries of this nature. They want to help you though, so please don’t hesitate to call them or your mortgage adviser if you need help.
Lost your job or your tenant is not able to pay rent?
Banks will assess a move to interest-only if you need to cut back on costs due to disruptions to your income. Banks may also consider applications to approve a top-up on your loan to get you through this time also. You can also consider requesting a mortgage repayment holiday for up to 3 months. Keep in mind though they are not waiving your mortgage payments, they are simply ‘tacking on’ a few mortgage payments to your overall balance.
In summary, we all like to think we’re rational individuals who respond clinically to unforeseen risks, but in reality, when the world throws a curve-ball at us, we often react with too much emotion. Our feelings are not great motivators for making smart money moves. Keeping a clear picture on what your long term investment objectives are, is key during these short term periods of scary uncertainty. Investing is about expanding your footprint in financial markets and we use tools that are far from perfect to do this – you need to understand the risks but don’t succumb to fear…