Making sense of the mortgage landscape

Yellow field landscape, converse shoes in foreground

There’s no doubt about it – the mortgage landscape has changed. Credit markets are tightening and rates have started to go up. So here’s the low down to help you make better decisions, whether that’s to borrow more or pay the mortgage off faster.

First up, borrowing more. Even though interest rates have started going up they are still relatively low, so the temptation is to borrow more. It could be for that home renovation, upgrading or even building new. So what can you expect?

There’s been a lot of talk lately about the Reserve Bank restrictions, but luckily, new houses are exempt. If you can afford the repayments, it is possible to borrow with as little as a 10% deposit.

In contrast, if you renovate, then the Reserve Bank restrictions do apply. Under the current restrictions it’s hard to borrow over 80% loan-to-value ratio on an owner-occupied and over 60% for a rental property. Banks are also increasingly tough on paperwork, so expect to jump through plenty of hoops and get dragged through the wringer backwards.

Another option that can be easier is to borrow using a secured personal loan outside of the bank rules. For example, Squirrel Money (our peer-to-peer platform) will lend up to $70,000 typically at rates below 10%.

When buying an existing house, you’re unfortunately well and truly stuck inside the rules. You will need a 20% deposit for owner-occupied and 40% for a rental property. First home buyers can sometimes get away with a smaller deposit if they have good income.

In the past, clients would buy a new property and convert their existing property into a rental. This practice is now too difficult and too costly. Home buyers will most likely need to buy and then sell. This is where bridging finance can come in handy, as we can often bridge a sale making it easier to buy first and then sell.

How much you can borrow is one thing, but what about the cost? Mortgage rates have increased over the past three months and the media and banks are talking up mortgage rates. In my opinion, mortgage rates will stay relatively low however. There are some counter-acting forces at play that will keep overall rates low, but lead to some short-term increases. It would be reasonable to plan on rates between 5% – 7% which is a lot lower than the 10% type rates we saw back in 2007.

Having said that, the rates on investment properties will increase more than owner-occupied. Banks are being forced to hold more capital for investor loans and that is gradually being reflected in higher pricing for these loans.

It pays to talk to a mortgage broker about your mortgage rates. Their service is free and they’ll be aware of the pricing options in market. You can save 0.20% – 0.30% by simply being more aware of the pricing disparities which translates to a saving of between $1,000 – $1,500 per year on a $500,000 mortgage.

In terms of mortgage rates, the best value for money at the moment is the 2-year or 3-year fixed rate which are both still below 5%. There is absolutely no reason to have your loan on a floating rate. If you don’t have much time left on a fixed rate it is also worth considering breaking it early to fix again now before rates go up and whilst it is still possible to get cash backs. Banks will provide cash incentives for new business, but this is slowing down and will eventually disappear. If you’ve had a cash back previously, remember that the bank can claw it back for between 2 and 3 years after it is paid.

When it comes to managing your debt, there are a few other tricks to consider. Don’t have all your loans with one bank. If you have multiple properties it pays to spread them around, especially given tighter credit conditions. You never know when you’ll need it! Also, make sure you leave some buffer inside your mortgages. The rule is to ask for money when you don’t need it, because when you do need it, you won’t get it. Depending on how your loans are structured it will also impact on how the LVR rules are applied to your portfolio. Now more than ever it’s important to plan carefully, so talk to your broker and have a plan. Also make sure your portfolio is optimised for tax. It staggers me how many accountants don’t provide proper advice on this!

Phew, that’s a big brain dump. But if there’s one piece of advice in all of this, it’s sit down and talk to someone. It won’t cost you anything and might save you a whole lot of money, time and pain.