Economic turbulence continues in the world, in the New Zealand economy and in the local mortgage market. With the OCR drop in June and several more predicted by March next year there has been a flurry of activity.
Our clients are pro-actively managing their mortgage exposure with our help, mainly looking at the option of breaking their fixed rates and then re-fixing with a view to picking the bottom of the market largely on six month / twelve month terms. The best rates are in the six month to two year bracket i.e. on-shore influences versus the longer term rates which are influenced by off-shore forces. When (if) the US commence raising rates in September as is forecast we may see the interesting phenomenon of short end falls and long term increases, but who really knows for sure?.
The most important thing is to know what your options are and what is available. So far we have seen short term rates as low as 4.49% (larger deals) and cash contributions when changing banks as high as $12,000. Amazing really, but such is the competition out there and no doubt the banks are wanting to fill their boots before the landscape changes for the investor market on 1st October 2015. One client has investigated and is proceeding to pay $25,000 to break their seven figure loan.
The problem is we still don’t know exactly how the investor class of asset will look. My feeling is there will be an investor interest rate margin of less than 1%, which will still allow investing in property to be attractive especially with rates so low and going lower.
While interest rates are falling, the banks are continuing to use the 7.50% to 7.75% interest rate factor and 30 years principal and interest calculation to work out their clients’ affordability. Historically this would now have be in the low 6%’s and it is certainly is not making it easy for an investor to grow their book. The bank policy of having a stringent servicing test is not silly, however the 30 years principal and interest test is really out dated with banks now allowing 10 through to 30 years on interest only.
The break cost of any loan, in theory, should be very easy to calculate i.e. on a $100,000 loan, with one year to go and locked at say 6.00% and reducible to 5.00% the break fee should be $1,000. Unfortunately in the real world it is not like that and hence the need to review your costs often as the fees may allow you to ‘win’ and vice versa. The banks use either what they call wholesale or retail calculations and there are large variances between banks. I have seen a couple of clients ‘win’ big with what almost seemed like a straight out bank error. Even if you are only even with a break cost, it could be a wise action to break now with further rate reductions coming.
It is also very important to pay the break fee with cash, if you can, as adding the break fee to the loan would typically double the effective cost over the term of the loan, however if reduced cash drain is the goal then it is still worth a look.
Here at Tony Mounce Mortgages we have continued to expand and have recently welcomed a new Commercial Manager, Jonothan Corbett to run the day to day operation of TMM and allow me to continue to focus on my client’s mortgage needs. We also have several other new staff ready to help, so do call if you would like to chat about any matters raised in this article. If you wish to review your mortgage/mortgages do not hesitate giving myself or one of the team a call on 0800 MOUNCE or visit our website www.tonymounce.co.nz
Disclaimer: This article is published solely for informational purposes and represents Tony’s opinion of the market as it stands as at the date of writing. To the extent that any information or recommendations in this article constitute financial advice, they do not take into account any person’s particular financial situation or goals. Tony Mounce Mortgages strongly recommends readers seek professional advice prior to acting in relation to any of the matters discussed in this article.