YourMoney Avoiding pitfalls of mortgage mistakes
INTEREST rates are on the way back down again. Home lenders are already starting to sharpen their knives, with many of them passing on the Reserve Bank’s cut in full.
The juicy deals look tempting, but only fools rush in. Economists are expecting two to three more cuts by the end of the year, which means there might be more fat to trim yet.
No-one knows the future, so nailing the timing perfectly is a matter of luck. However, steer clear of these five mistakes, and you can make sure you get the right rate for you.
DON’T PICK THE LOWEST RATE
Wellington mortgage broker Simon Rule says one of the most common mistakes people make is automatically choosing the lowest rate on offer.
‘‘You’ve got to look beyond that. The moment you lock into a long-term agreement, if rates then drop any further, there’s going to be what’s called an early repayment fee.’’
Break costs are typically several thousand dollars, which the bank is contractually allowed to charge to cover its losses.
Plenty of people are now kicking themselves for locking into deals that looked good at the time, but didn’t offer much flexibility if rates fell.
DON’T RUSH IN
The Reserve Bank is expected to keep cutting its official rate over the course of this year.
Behind the scenes, the wholesale rates that underpin mortgage pricing have also taken a big fall, which the banks have yet to pass on.
For those reasons, Rule and others reckon both floating and short-term fixed mortgages will keep getting cheaper.
‘‘Are we going to see rates as low as 4.5 per cent? Twelve months ago you’d be mad to say that, but it could happen,’’ he says.
BNZ’s chief economist Tony Alexander is the first to admit that forecasting interest rate changes is near impossible. However, in his latest commentary, he says people shouldn’t be too hasty.
‘‘The incentive for borrowers at the moment is to sit back and wait for the next round of cuts in fixed rates.’’
Rule says rates are moving so fast that he leaves his rate negotiations with banks as late as possible.
‘‘My advice for most owner-occupier people is to keep things on a short term, and review things every six months or so.’’
Reserve Bank figures show most are doing just that, with the vast majority in terms of less than two years.
The ‘‘special’’ short-term deals where banks have chosen to compete means there’s been a huge swing away from floating interest rates.
However, Rule says some borrowers are even considering going back to floating, with the prospect of a discounted 5.25 per cent rate on the horizon.
DON’T GET GREEDY
Rule says it doesn’t make sense to lock in for long terms at the moment, unless you have a specific reason to do so.
On Wednesday Anton Verryt and his family moved into a four-bedroom home in Auckland’s Green Bay, having outgrown their last house.
The project manager for bathroom renovations is self-employed and his wife is studying, so household income can fluctuate.
That meant locking into a fixed term at 4.95 per cent was an easy decision to make, Verryt says.
‘‘It suited us to be fixed for two years; we know exactly what we’re paying. For us it was a bit of a no-brainer.’’
That’s a smart move. BNZ’s Tony Alexander also included a cautionary note on the risks of chasing perfect mortgage rates.
He says if he were a borrower he’d play the sit-and-wait game, but still snap up a 5 per cent three-year rate, or 5.5 per cent for five years
Have your target number in mind, and don’t keep shifting it lower every time rates move. One of the reasons it’s dumb to pick the lowest rate on the brochure is that you’re probably leaving money on the table.
Rule says he’s negotiated big discounts of 70 basis points or more off what the banks advertise publicly. Even so-called ‘‘special’’ rates can be sweetened for the right borrower.
This is where a broker can help you. But you can also play hardball with your bank manager yourself. ‘‘Ask and you shall receive,’’ says Rule.
And even though they’re not advertising it as heavily, he says banks are still giving away cash or offering to pay costs.
‘‘It’s usually the more you borrow, the more they’ll give you,’’ he says.
Verryt managed to score $4000 cash thrown in on top of the special two-year rate – not exactly what you’d call pocket change. New Zealand Mortgages & Securities director James Kellow also expects short-term rates to move lower still.
He says one common strategy is to break a mortgage up into several different tranches, and spread the rates across different time periods.
Kellow’s clients are commercial borrowers, who are more clued-up than the average Joe when it comes to managing risk.
If you’re fretting about pinning all your hopes on one rate, why not take a leaf out of their book?
There’s nothing to stop ordinary borrowers from keeping a portion of their loan floating and splitting the rest across various terms.
You won’t come out with the best possible rate. However, you will also avoid picking a total dud if rates move against you.
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