Increasing savings and avoiding debt stress in an uncertain world
The world in 2021 is a very volatile place but it still has market opportunities. As the COVID-19 pandemic continues to play out, even international tourism could be turning the corner. Peter Wood, Managing Director of Bluestone New Zealand, sees the trans-Tasman travel bubble as a much needed economic boost and not just to tourism.
Domestically, the New Zealand housing market continues to ride high on the back of low interest rates.
“There is no doubt that the housing market has bounced back particularly well and continues to thrive,” says Wood.
He sees an opportunity in the recent actions by the Reserve Bank of New Zealand concerning high Loan To Value Ratio (LVR) and investor loans that could lead to credit tightening by the major banks.
“This, in turn, could lead to wider opportunities for non-bank lenders to accommodate some of this business,” he says.
Loans for the self-employed are also important for non-bank lenders. Wood encourages flexibility.
“Self-employed borrowers may have more difficulty than previously due to the fact that revenue streams from their businesses will potentially be down. This will most likely impact their capacity to fund new home loan purchases or consolidate short term debt using built up equity in their home.”
He says most major lenders require two years of financial statements to support any home loan application. This is problematic, even for recovering businesses, because of the financial ups and downs caused by the pandemic.
“It’s clear we need a flexible approach when it comes to assessing income for self-employed borrowers,” says Wood.
“We can provide that by using their business bank statements and GST returns, or even a letter from their accountant, which supports existing income streams.”
Some companies are also facing debts to Inland Revenue (IRD).
“These kinds of debts can be a dealbreaker for many lenders, which can make obtaining or refinancing a loan difficult,” says Wood.
“We’ve helped many self-employed borrowers consolidate IRD debt by refinancing their home loan, and with the end of the financial year upon us again, we expect more borrowers will be looking for this solution.”
However, despite the pandemic, Wood says market debt stress levels are not yet as high as some feared.
“One change we have seen is that people have built up more savings over the pandemic period. For example, many people who would have normally spent money travelling overseas, have instead put the money into savings.”
Wood says these savings and historically low interest rates may offset any debt stress and help borrowers maintain their commitments.
“Many borrowers also took up debt repayment holidays. It will be interesting to see what happens when debt repayment holidays come to an end and support for affected businesses reduces and expires over the coming months,” says Wood.
Consolidating debts – mortgages, personal loans, car loans, credit cards and short term loans – is often worth considering, although seeking independent advice from a licensed mortgage adviser would be recommended,.
“Borrowers who have a high level of short term debt at high interest rates ranging from 6% - 20% might want to think about consolidating these debts into one monthly home loan repayment using the equity built up in their property over the past few years.”
Wood cites the case of a client who was looking to refinance their existing loan from a competitor, repay a personal loan from another lender and consolidate some small credit card debt. To do this, they needed $866,900 secured against an owner-occupied home worth $1,020,000.
“Because of the 85% LVR, they were not able to obtain funding from the banks,” says Wood.
“But they were able to obtain the funding they needed through our Near Prime product. As a result they consolidated their debt and now save $1,788 per month.”
