Options to avoid a mortgagee sale
Rapid interest rate rises, declining property values and a higher cost of living are catalysts for mortgage stress, but there are strategies borrowers can use to reduce costs, a financial adviser says.
Cutting back on discretionary spending and negotiating any personal or student loan repayments is also an option for those in hardship, according to a budgeting expert.
After purchasing their home in 2021 and fixing most of their mortgage ($900,000) for two years at 2.5%, an Auckland homeowner couple have spoken out about their financial challenges after their fixed rate term ended in November, causing their mortgage repayments to jump by $1,500 per month.
Having refixed the same borrowing at 7.09%, the homeowners said that their lives revolved around work and the mortgage. Despite two incomes, “it’s not really worth it” to be homeowners, they said.
NZ Adviser asked a financial adviser and budgeting expert to provide general comments on the options available for these homebuyers and others in similar situations. Their responses (below) illustrate the value of working with an adviser throughout the process and planning ahead, including preparing for higher interest rates well before a borrower's fixed mortgage interest rate expires.
Interest rates in 2020 and 2021 were ‘artificially low’, adviser says
Jeff Royle (pictured above left), a financial adviser at iLender, emphasised that recent homebuyers needed to appreciate that interest rates throughout 2020 and 2021 were not “normal”.
In 2019, mortgage stress test rates were around 6.5%, whereas currently, they average around 9%, he said.
At the onset of the COVID-19 pandemic (March 2020), the Reserve Bank of New Zealand cut the official cash rate to a record low 0.25%, providing forward guidance that it would retain this setting for at least 12 months, the first increase occurring in October 2021.
“There should have been a conversation around interest rates being artificially low (and why) and taking into account the borrower’s situation, a recommendation to fix for as long a period of time as possible,” Royle said.
“If that advice was given and the client went against it, the adviser needs to make a note to that effect in the client’s file.”
Royle also noted that LVR restrictions were removed on 1 May 2020 and reinstated in March 2021, allowing homebuyers with lower deposits to enter the property market.
Fixed mortgage interest rates currently range from 7% to 8%, a level that Royle considers to be in the “average zone” for New Zealand. What is a bigger issue is the “rapid change” of interest rate increases, he said.
The Reserve Bank left the official cash rate unchanged at 5.50% in November but its forecasts signalled that New Zealanders might not see interest rates drop until mid-2025.
While forecasts on the official cash rate differ, Royle acknowledged that when rate cuts do arrive, they’re likely to be gradual, meaning “the pain of today’s interest rates is not going to go away”.
Options to combat mortgage stress
The very first step homeowners in this situation need to take is to talk to their adviser or lender, Royle said.
Homeowners experiencing mortgage stress have three options:
- Stay on principal and interest repayments and extend the loan term.
- Change repayments to interest-only.
- Take a mortgage holiday (defer repayments) either in part or full.
Royle said borrowers who had less than 20% equity in their home generally had difficulty getting interest-only or loan deferrals approved.
“At a high LVR, I don’t think [interest-only or loan deferral] is the answer, or if it is, the question is whether it is sufficient to make a difference,” Royle said.
Royle also noted that a mortgage of $1.1 million is a lot to take on, particularly for those with a young family. It is important that new mortgage borrowers take their future plans into consideration before committing themselves financially, he said.
Avoiding a mortgagee sale
The two obvious ways to manage higher mortgage repayments are to either reduce outgoings, increase income, or both.
Royle suggested that among the questions the homeowners could ask themselves is what alternatives are available to daycare (e.g. family assistance, whether it’s feasible and cheaper to have a live-in nanny), and whether family could chip in financially to spare them from being forced to sell.
Cutting back on negotiable spending such as gym memberships, Netflix and coffee can be hard for borrowers to do, but they are also not forever.
“It is to maintain the most important thing, which is to keep a roof over your head,” Royle said.
Shula Newland (pictured above right), owner and manager of Full Balance Financial Coaching, has seen an increase in the number people encountering mortgage stress over the last six months.
While people had been more savvy about with cancelling monthly memberships they didn’t use, Newland said that takeaways, entertainment and retail were common discretionary areas for overspending.
“If you’ve got any loan payments and you are in hardship, they can be negotiated,” Newland said. “Another practical thing is if you’ve got a student loan and are in hardship, you can apply to put that on hold or reduce payments.”
From an income perspective, it’s also worth checking benefit entitlements, as is the possibility of taking in a boarder or flatmate, which could provide that much-needed income to make the mortgage more manageable.
Are you a homeowner struggling to meet your mortgage repayments? Or an adviser helping people in a similar situation? Share your comments below.
