Adviser divulges top three client questions
As mortgage borrowers roll off lower fixed mortgage rates this year, Kris Pedersen Mortgages is working with clients to make sure they're prepared ahead of time.
According to Infometrics February data, the proportion of mortgage lending on fixed rates sat at 90%, with 11% due to roll off over January to March, 14% between April and June, a further 30% in the second half of this year and 31% in 2024.
In 19 months, the official cash rate has jumped from a record-low 0.25% to 5.25%, meaning borrowers who fixed at significantly lower rates in 2020 and 2021 are facing significant increases to their mortgage repayments, in addition to cost of living increases.
Kris Pedersen (pictured above), managing director of Kris Pedersen Mortgages told NZ Adviser that it was important clients were made aware of the potential payment difference between their current and new repayment amount.
Pedersen, whose client base is comprised of around 90% investors, shares three questions he is asking clients ahead of their fixed rate rollover date:
1. Communicate the repayment difference (including interest-only to P&I)
As a first step, clients need to understand what their repayments will look like.
Pedersen said that some clients may have both their fixed rate period and their interest-only period expiring.
Even if their lending is on interest-only and the expiry date is different, Pedersen said that borrowers in this situation may be moving from an interest rate of 3% to 6.5% or more.
“The biggest concern is they may be coming off an interest-only period and moving to principal and interest at the same time and are suddenly faced with the accumulation of the interest rate hike and that P&I change,” Pedersen said.
Pedersen said that older investors and those that have had their mortgage in place for some time were likely to be hit the hardest, as they were used to rolling the interest-only periods over again and again.
“Previously the banks would roll the interest-only periods over … with the regulatory changes connected to the CCCFA, a lot of banks are putting clients through a full application processes,” Pedersen said. “If they don’t meet the criteria, they force them into principal and interest.”
While some banks were being more reasonable about this issue, Pedersen said for those who could not refinance, this was likely to be a significant repayment change.
“A lot of people just don’t know their numbers, and while we can be talking about the interest rate, it’s the repayment difference that they need to be aware of,” Pedersen said.
2. Discuss client’s current financial position
Pedersen said that he also spent time with clients discussing their current financial position. In some cases, clients were looking at ways they could reduce their repayments. Others were sitting on considerable cash, which they put aside as rainy day money.
“In some cases, it makes sense that if they’re diligent with their money, that they change part of the mortgage into a revolving credit or offset facility and put the cash in there to reduce expenses,” Pedersen said.
Often, the financial review involves getting into the client’s persona, in terms of how they view and manage their money, he said.
3. Loan restructure, extension of terms
Borrowers who need guidance with money may be more suited to a simple fixed rate, whereas those who have money left over may refinance their loan, with part on a fixed rate.
“Those who are good with money may still be feeling the pain of the interest rate increases … in those cases, it may be how we change the structure of the loan,” Pedersen said.
Rather than just refixing a mortgage, Pedersen said that in some cases, it made sense (as long as clients were aware of the positives and negatives) to extend the loan term.
In one example, a client had a monthly repayment of $1,080 per month and were paying principal and interest for an investment property. If the loan was left to roll over onto the new fixed rate, repayments would increase to around double, at $2,400 per month.
By extending the loan term back out to 30 years and giving them some flexibility in the next 12 to 18 months when they know it’s going to be a bit tight, the monthly payment was reduced to around $400 per month, he said.
“We’re extending the term out, yes they’re paying more, but it’s to buy time,” Pedersen said.
The strategy can be used to buy time, for example to wait until the market improves before selling a property. Ideally, the loan would be reviewed, and payments increased back up according to the client's needs, he said.
Pedersen said it was also valuable to discuss clients’ plans, including current and future changes, such as interest tax deductibility, and intention to sell.
While longer-term fixed mortgage rates are generally lower than short-term fixed rates, it’s wise to consider current market conditions, he said.
“You don’t want to be refixing for four to five years if there’s a chance interest rates might drop in the 12 to 18 months’ time,” Pedersen said.
How are you helping clients ahead of their fixed rate expiry date? Share your ideas in the comments section below.
