Banks offering you cash for signing up a mortgage is a relatively new phenomenon, and one that won’t last much longer. It took hold during the ANZ/National bank merger. Other banks used cash to acquire new customers. ANZ used cash to retain them. Once it took hold and almost became expected it started to look more permanent and banks were nervous to step away from cash incentives.
Banks are under profit pressure and will look to expand housing margins. This means a bias towards higher rates and less negotiation. So cash backs won’t last. For borrowers, cash-backs have helped ease the cost of any break fees and often made it viable to break fixed mortgages early and/or refinance for a more competitive deal. The changes are broader than that and will impact on future rates.
For a start, the Reserve Bank is restricting growth via LVR restrictions, which encourages banks to chase margin and be less price competitive. The RBNZ has also implemented higher capital requirements for investment property. This increases the funding cost of investment property loans and pricing will go up to reflect the higher costs. However, at this stage banks have not responded to this uniformly, so there are some short term competitive pricing opportunities. And on top of all of this, globally, mortgage rates look like they could start to trend upwards.
Now what about your mortgage?
When is the last time you properly reviewed it, and do you know what your options are? With rates heading up, it could make sense to break your loans now and refix whilst rates are still low. Typically, borrowers and advisors will focus on the break cost versus the interest saved. This will for the most part be cost neutral with any net benefit coming from the cash back. However, the other benefit is the opportunity to lock in a longer-term fixed rate (if that’s what would suit you.)
It’s also an opportunity to look at other aspects of your mortgage. How much do you have on a higher floating rate? I was staggered to discover the other day my floating rate had rolled off its discounted rate and was on a carded rate of 5.59%. It had been on that rate for 12 months! Either I should have got a decent discount loaded or fixed it. I’m going to fix it for a year at around 4.15%.
There is roughly $40 billion of mortgages on floating rates paying way too much in interest. Should we set you up with access to more surplus funds? It’s getting harder and harder to borrow money due to LVR restrictions and banks being more painful about paperwork and proving your servicing ability. For that reason, never give up “credit limit” without thinking about it. When you make a lump sum payment, get your Revolving Credit limit increased at the same time. It doesn’t cost you anything, you still pay the loan balance down, but you have access to credit when you need it, no questions asked. This is really important now and you’ll thank me for it later.
How can we strategise the way forward given LVR restrictions?
Should you split your lending across banks to de-risk your portfolio? It’s important to have options and not have your life dictated by your bank. Living with someone is hard enough, let alone having to live with your bank. Try topping up your home loan to renovate. You’ll need consents and quotes or contracts for everything. Often building doesn’t work that way. You might find yourself outside LVR limits. Try and draw funds out of your house for the business or renovations if you own a rental property. One very big risk is selling a property and assuming you’ll get the proceeds. Most homeowners don’t realise that the release of the mortgage gives the bank a huge amount of power and puts it at their discretion. The bank can and might very well take all of the proceeds to pay down other mortgages because you are outside LVR limits or your servicing isn’t strong enough.
What would happen if the RBNZ put in debt-to-servicing ratios?
It hasn’t, but do you want your life impacted by changes you have no control over? What sort of things can you do now that put you into a better position should the rules retrospectively change again? These are all valid questions. Given the state of flux in the market, the possibility of rising mortgage rates, tight credit conditions and a slowing housing market, now is the perfect time to sit down with an adviser and review your situation. It’s FREE! If you’d like to sit down with one of our advisers, then call our Client Services Team on 0800 21 22 30 or email them on clientservices@squirrel.co.nz and they’ll set you up with the right adviser for your needs. Even better, jump online and do one of our Mortgage Applications so we have something to start with.
You can read more about the importance of reviewing your mortgage here.