Don’t panic!
Mortgage rates are on the way back up after declining for a quarter of a century, but it’s not necessarily a cause for alarm, writes Rob Stock.
New year, new mortgage fears. Mortgage rates have been heading up, which is causing jitters for homeowners.
But Squirrel Mortgages’ John Bolton says they can dial back the fear because the golden days of low interest rates aren’t over.
The rises, which began mid-2016, have lifted two-year fixed-rate loans to between 4.69 and 5.25 per cent at the banks, but they aren’t the prelude to a return to the highs of 8, 9 and 10 per cent rates in 2007 and 2008.
Instead, they are the result of higher funding costs for banks, and the end of cut-throat competition for home-loan customers.
Mortgage margins
Rates aren’t returning to 2007 and 2008 highs, Bolton believes.
That would require international bankers to class the New Zealand economy as a basket case, which it isn’t, given low inflation, economic growth and high employment.
The banks are blaming rises in funding costs for them lifting their rates, Bolton says.
It’s partly true, he says, but faced with lower demand for home loans, banks aim to hit their financial targets by lifting their margins on loans to earn more from each loan.
They’ve now done that, he says, positioning themselves to hit their first quarter earnings targets.
The ratcheting down of competition has left quite a spread between bank rates, so it is worthwhile to shop around.
Cash-backs
The changing face of lending will see cash-back offers vanish, Bolton says. These are cash sweeteners given to homeowners when they take out loans, for example, $2000 on a loan of $250,000 or more.
Tempting as they are, the most logical thing to do with ‘‘cash back’’ is to pop it straight back into the mortgage, to reduce your debt immediately.
Cash-back offers appeared when ANZ and National Bank merged, Bolton says, designed by rivals to woo unsettled ANZ home-loan customers.
‘‘The environment is just a little less competitive and you are not seeing crazy offers and such competitive pricing out there.’’
Mortgage adviser Campbell Hastie from the Go2Guys says banks are no longer so quick to pull the cash-back rabbit from the hat, or to match a rival’s offer.
Discounts
Some borrowers may find it harder to get, or keep, discounts off their bank’s advertised rates.
Many people don’t pay the advertised mortgage rate. They negotiated a discount on their fixed and floating rate loans, and they have to fight to keep them each time a portion of their loan is refixed.
This could be the year that it becomes harder to get the same discount at re-fix time, or when arranging a new loan.
Don’t even bother if you haven’t got at least 20 per cent equity, Bolton says.
People need to keep a close eye on their floating rate loan discounts – Bolton says that last year he got a discount shock.
‘‘I was staggered to discover . . . my floating rate had rolled off its discounted rate and was on a carded rate of 5.59 per cent.’’
He’d negotiated the discount over a year earlier, but as banks load floating rate discounts for just 12 months, they can roll off without the bank notifying the borrower.
‘‘There is roughly $40 billion of mortgages on floating rates paying way too much in interest,’’ Bolton estimates.
The bank margin on floating rate loans is high, so anyone with a decent amount of equity should be paying 0.5 per cent less than the advertised rate, he believes.
‘‘The ones who have negotiated hard have got more than that.’’
Hastie has seen the tougher stance of banks first-hand.
One client wanted to extend his revolving credit facility to do up the kitchen. The bank agreed, but told him he’d lose his floating rate discount.
Credit limits
This is a time to hold on to revolving credit facilities, even if they’re not needed right now.
Hastie says the banks can reduce limits at any time, but at least while they are there there’s no application hoops to jump through.
Revolving credit facilities, which borrowers often use as a portion of their home-loan, are becoming popular.
Revolving credit allows borrowers to withdraw money they have already paid off the loan. It’s often used by people with lumpy incomes (for example, commission), and as part of mortgage-reduction schemes like that operated by Kiwibank-owned New Zealand Home Loans.
Reserve Bank figures show that in November there was $6.3b of new home loan lending. $2.2b of that was interest-only loans and revolving credit facilities. And of that $2.2b, $1.3b were loans to owner-occupiers.
‘There is roughly $40 billion of mortgages on floating rates paying way too much in interest.’ Squirrel Mortgages’ John Bolton, left