Advisers discuss strategies used
Rising interest rates are prompting borrowers to safeguard their financial position, and there are a range of strategies used to achieve this, mortgage advisers say.
Refinancing to another lender and/or changing the loan structure are examples, which may include all or a portion of the lending on one or more fixed interest rates.
According to Infometrics February data, a record 90% of mortgage lending is on fixed rates, with 14% of mortgage holders to roll over between April and June and 30% in the second half of 2023.
Infometrics said the 90% figure was a record high number and a further 31% of fixed rate loans would roll off in 2024.
A March survey conducted by independent economist Tony Alexander and mortgages.co.nz, which gathered responses from 52 mortgage advisers nationwide, indicated borrowers were evenly split between favouring one year and two year fixed rates, at 49% and 51% respectively.
Lisa Barton (pictured above left), financial adviser at Money Empire, told NZ Adviser that while she was seeing a large portion of clients wanting to refix, borrowers are considering a wide range of options.
“When borrowing is moving from the 2% to the high 6% range, it is really about understanding the client’s full financial position, checking if anything has changed since their last rate renewal and if they are aware of any future income or lifestyle changes,” Barton said.
Before recommending a fixed rate option, conversations should include the client’s needs and wants for a future property and their timeline, she said.
Taking into account the uncertain economic outlook and the risk that inflation may persist for longer, Barton said that her strategy was to review a client’s current and most accurate financial position and their expected changes over the next one to two years.
The client’s position is factored into a budget or plan which guides a discussion around suitable options, including whether to refix and for how long.
While there was no single fixed rate term that proved most popular with clients, Barton said quite a few clients were restructuring their lending by splitting their facilities between fixed, floating and revolving credit.
“This will enable them to take advantage of extra income or potential bonuses to reduce the lending on the floating or revolving credit, and a possible reduction in interest rates over the period ahead,” Barton said.
Wayne Henry (pictured above right), founder and director at Wayne Henry Mortgages, told NZ Adviser for new client relationships and first home buyers, a split lending strategy could work well, as it limited their exposure at any given time.
Clients who are refixing are typically locking in rates for one year, 18 months or two years, Henry said, noting that the 18 month fixed rate option had become more popular.
Henry said that one of the challenges in the current economic climate was the differing views of economists on when the current monetary policy tightening cycle will end.
In its March 13 Economic Weekly report, ASB is forecasting a 0.50% cash rate hike in April, with the OCR on hold at 5.25% until the second quarter of 2024, at which stage the OCR is forecast to reduce to 3% by mid-2025.
Kiwibank senior economist Mary Jo Vergara confirmed the bank’s forecast was in line with RBNZ guidance – a cash rate peak of 5.50%, and rate cuts pencilled in from November this year.
Some financial experts are of the view that further rate hikes may be necessary to rein in inflation. Independent economist Cameron Bagrie has warned that the inflation pattern and inflation expectations are uncomfortably high, indicating 2024 is too early for the RBNZ to be cutting rates.
“From past experience, what I do know is that we are heading into some pain … Kiwis tend to put their heads in the sand and wait until things have happened before they take action,” Henry said.
Borrowers who are proactive and have good relationships with their adviser (or bank), have the opportunity to get ahead, he said.
“Advisers who are getting clients in within that 60 days, those are the ones that are going to be able to have those robust conversations, and we can split the loan, relock it in or look to take them to another bank, if necessary,” Henry said.
Some banks are offering a 1% home loan cash back up to predetermined maximum (e.g. $10,000 or $25,000), which Henry said could be an attractive option for clients who are refinancing.
Kiwibank has a free refinance service, and its variable rate remains competitive against other banks, which can suit business clients or those who want to put some extra money away in a flexible or variable facility, he said.
