Confusion in the Ranks – Mortgage wars and the Budget

Olly Newland’s client newsletter May 2012

To fix or float? has become one of the most pressing decisions anyone with a mortgage has to face especially now.

Lenders are slashing rates left right and centre. But how much further?
From all sides a thousand voices argue one way or the other.

Had anyone listened to the advice given out by some of “experts” and bankers to fix then — for 6 months, 12 months or longer — it would have cost them a bundle.

We now have the lowest interest rates in 50 years, not only in New Zealand but in most other countries in the world.

In the USA Home mortgage rates are at a record low — frequently under 4% for up to 30 years fixed.
See: Rates keep dropping

Likewise the UK mortgage rates are at a record low between 4.5% and 5.5%: Compare Rates

And in Germany rates hover around 3.5% to 4%

Now we have the same phenomenon in New Zealand with banks vying with each other in cutting rates.

Why is this?
What’s going on?
The answer may be simpler than many think.

With the demise of finance companies, and recent performance of the ‘risky’ share market (in some people’s view, run by rogues with inside knowledge) the only ‘safe’ place to put spare cash is in the bank.
Hence the banks are awash with cash and need to get it out working.

Banks survive on the small margin between what they pay for deposits and what they receive by way interest from borrowers.

As usual, there are fish hooks

Here’s the kicker: The real reason banks are cutting interest rates is to obtain the “add-ons” that come with granting a mortgage.

With the mortgage they hope to get more rewarding and lucrative interest rates by lending to you other products that is well above the measly home mortgage rates e.g., credit cards [9 to 19%], car loans [8 to 14%], overdrafts [9 to 17%,] fees up to 20%, not to mention life insurance, home and contents insurance, and mortgage insurance as well.

There is another strange oddity where we have floating rates often more expensive than fixed rates – but as usual there’s a catch.

The catch here is that with a fixed rate you are trapped with that particular bank.

At present the beauty of floating rates is the ability to go from bank to bank to compete for your custom.

Recently I assisted a client who was offered a mortgage at 5.5% floating. With my advice he approached another bank and was quickly offered the same deal at 5.25% .

He then went back to the first bank which matched that rate and knocked further 0.2% off that!

He then returned the second ask and got an even better deal! He ended up going with the original bank at 4.99% … which just shows you that competition is alive and well.

Moral of the story – banks hate competition. They want to lock you in so make them pay for the privilege if you can.

See below for 20 Questions you should ask your lender BEFORE you sign or renew your mortgage.

Where to Now?

It is my view that interest rates have further to fall yet … perhaps by as much as 1%. Now that might not sound much but to the maths

A $400,000 mortgage at 5.5% = $22,000 p.a interest
The same mortgage at 4.5% = $18,500 p.a. interest
A saving of $3500 per year or $67 per week. Probably enough to keep the family car in petrol or pay the bus fares 52 weeks in the year.
Not bad money if you can get it.

So in my opinion this is NOT the time to fix, but to stand back a little longer and keep your mortgage floating — bearing in mind that you are free to swap banks any time you want.

And here’s another thing: The quoted rates at any one time are not necessarily what you have to pay.
Banks frequently cut special deals below the quoted rates.
So give it a go. If you don’t ask you don’t get.

Whose advice should you get?

The last person you should ask is your bank manager. (C’mon use your common sense!)
Would your bank manger give you unbiased advice like, ‘Try another bank’? (Do turkeys vote for Xmas?) Hardly likely.

Not to pick on them, but only a short while ago the ANZ was suggesting fixing your rate. Now they are slashing them again: ANZ National cuts rates
So much for THAT advice!

How about your lawyer or accountants?
They would be better but, with all due respect, many lawyers and accountants have no idea either.

Some people think that just because someone is a lawyer or accountant it makes them experts in property as well. This is not the case at all. I have seen to many situations where these respected professionals make colossal boo-boos in the subject.
They may be brilliant divorce lawyers or business advisors but on interest rates they have no more clue than the man in the street.

Independent mortgage brokers (and I emphasize “independent”) are much better but the best in my (biased, naturally) view are independent property consultants such myself as we have no allegiance to any bank – only to the client.

See below for 20 Questions you should ask your lender BEFORE you sign or renew your mortgage.

The Downside

The people who are missing out are the term deposit investors who are obliged to take lower and lower rates on their savings. This is the other side of the coin and it would seem to me that depositors should be compensated by at least by having their loans either indexed to inflation, modest as it is, or the tax on their returns adjusted for the same reason.

The one disquieting side effect of low interest rates for depositors is the inflation effect. We may be setting ourselves up for massive inflation some time in the near future as low interest rates encourage people with any sort of money to look for alternative investments.

The art market is one of these outlets.
Consider this sale of ‘The Scream‘. This sort of money for some pastel and canvas resembling the demented daubings of a monkey, is not rational and surely a portend of things to come.

The Budget

Another downside may be further moves by the Government in the budget to fill loopholes in taxes as they affect property investment.

It wouldn’t surprise me in the least if the Government re introduced Stamp Duty on property sales, or disallowed some more tax ‘losses’ in an effort to rake in more tax.

Any such moves would increase rents, since all costs to landlords are eventually passed on, so it’s not all bad.

In an effort to get people to invest in “productive  investment”, expect further disincentives – none of which will work but will, as usual will end up with even higher prices than  ever.

I have seen many times before. The more you restrict the market the higher prices become.
If you want to contain prices you make property more available, not less. Ask any economist if this is not  fact.

Any serious interference with the property market could lead to a ‘collapse’ as waves of selling sweep across the country with results we are all aware of when we look overseas. So let us hope our masters are aware of this fact and keep a very light hand on the tiller.

Olly Newland
May 2012
www.ollynewland.co.nz
© 2012 Olly Newland. All rights reserved.

FREE Report

I have prepared a list of 20 Questions you should ask your lender BEFORE you sign or renew your mortgage.
It would be my pleasure to send it to you with my compliments. Email me at Olly@NewlandBurling.com or use the contact form to request a copy.

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