Mortgage options: Getting the timing right

New Zealand’s housing market is once again confounding predictions of decline, surging in the wake of the Covid-19 lockdown.

For buyers, and especially first home buyers hoping for a break, that presents quite a challenge.

One of New Zealand’s most experienced mortgage brokers, 30-year veteran Martin Robinson, is warning anyone relying on mortgage finance that the first hurdle they will have to clear is getting timely action from their banks.

The Wellington-based broker, who is part of the Share network of financial advisers, says mortgage demand is so high some banks are taking 10 days or more to respond to applications.

“The lending community is frantic with enquiries,” he says. “I would advise anyone looking to borrow to start that process well before they need to borrow. ”

While activity is high, credit remains historically cheap. Interest rates are low and appear to be going nowhere. Once their loan is approved, borrowers will have to decide how they want to structure their mortgages. Traditionally they would do this by either accepting the floating rate, which in late July was around 4.4%, or to ‘fix’ it for a specified term. Fixed rates were being offered as low as 2.55% for one year.

When making those decisions, borrowers are, effectively, managing interest rate risk. Martin’s philosophy on that is simple: the longer you fix for, the more conservative you are being.

“Why? Because you want certainty for that longer period,” he says. “The less time you fix for, or if you go variable, you are being more aggressive. You are hoping the rates will go down and you’ll be able to re-fix when they’ve dropped.”

It’s aggressive because if the rates bounce back up, you risk having to choose a higher rate. That is where a mortgage ‘cocktail’ structure can come into play to cover both angles, Martin says. This involves having a portion fixed for, say, 12 months, which is the sweet spot for interest rates now. The rest can be fixed for longer in case rates go up.

“The other thing about the cocktail, if you are getting close to the maximum of your affordability, you would be better to go longer and be more conservative,” he says.

Borrowers also need to realise floating rates are often negotiable. While they are advertised at around the 4.4% mark, they can be negotiated down depending on the strength of the application.

“If you have 20% equity you can negotiate harder,” Martin says.
“But you can’t really negotiate if you’ve got less than 20%.”

Another reason a borrower might opt for a variable mortgage is so they can make additional lump sum payments to pay the mortgage off more quickly.

However, some lenders allow specified increases to existing payments during the fixed rate period. One allows an increase of fixed rate payments of 20% in any period, while another allows increases of 5% per annum.

With the pandemic comes volatility. Many have already lost their jobs and most are at increased risk of losing them. Martin agrees with standard advice that borrowers need to have a financial buffer in place.

“Who knows when a job is going to finish? It’s not a pleasant thing. It’s like turning the lights off, isn’t it? You’ve got to feel around to put the light switch back on.”