Your Review is About You not the Rate or the Return
At review time, clients often steer us towards the performance of their portfolio or the interest rates on their mortgage. Although these are important, the best advice we can give comes from understanding as much about you as we can.
As Tony Alexander writes below, there’s a lot of different mortgage offers being put forward by the banks at the moment. Many are not advertised.
We’ll share some recent examples of how we have been able to help clients by understanding a bit more about what’s changed and what’s important to them.
Recently we had a client with a fixed rate review, coming off a rate in the mid 3s. They had been fixed for 3 years and managed to save surplus income. A high paying on call account is currently paying around 4.50% interest. Current mortgage rates are around 6.50%. You are better off paying off the mortgage and saving 6.50% (before tax) than keeping your money in a savings account. However, this client wanted the funds for a rainy day. We recommended an offset facility that is offered by BNZ, Westpac and Kiwibank. Simply put, an offset allows you to offset funds you hold in savings against a linked mortgage. So, if you have $10,000 in savings, you don’t pay anything on $10,000 in the linked mortgage. This has the potential to save the client $20,000 in interest and take 6 years off their mortgage term. The client still has access to the savings if they need it.
We recently completed a Kiwisaver Review with a client. We were able to give the client an idea of what income she could draw from her Kiwisaver fund from age 65 to 90 based on her current investment profile, current income, contributions and timeframe to retirement. She felt that the income, even when you add in the NZ Super, wasn’t going to be enough to give her the choices she wanted in retirement. She thought about increasing her Kiwisaver contributions. However, unless your employer is matching you dollar for dollar there is no real value in increasing your contributions. Setting up an investment plan outside of Kiwisaver can set you up to achieve your retirement income goals, without locking your funds in until you are 65. This gives you the option to use these funds for other retirement assets like setting up a business or buying investment properties later down the track.
Reviews can be really important in helping us set you up to achieve your goals. They are as important as the initial consultation we have with you. It’s really important that we capture as much relevant information about you as we can.
From Independent Economist Tony Alexander:
Reducing commonality of bank mortgage offers
Things are now getting a lot more interesting in the mortgage interest rates market. On April 5 the Reserve Bank raised their official cash rate by a greater than expected 0.50% to 5.25%. There might be one more rise left to 5.5% – we’ll just have to wait and see what the data tells us between now and the next review on May 24.
The Reserve Bank didn’t actually say they expected mortgage rates to rise in response to the change, which is unusual. Instead, they noted that they acted to stop mortgage rates falling in response to bank borrowing costs going down recently in association with lower US rates following the banking sector ructions over there.
Some banks have raised their floating and 1-2 year fixed rates, and some have cut their rates for three years and longer. The main bank one year rate now sits between 6.49% and 6.74% and the three-year rate is now between 5.99% and 6.79%. These are wide ranges and if there were ever a time when it was necessary to consider the range of rates on offer that time is now.
This is not just because rates differ quite a bit. There are a variety of cashback offers being made by lenders. There also appears to be a range of feelings amongst the banks regarding whether it is wise or not to discount rates in order to minimise the degree to which sales undershoot lending targets because of the record low number of real estate sales occurring at the moment.
On top of that, gaps are opening up between banks regarding what they count as expenses, stress test interest rates, and how much effort they make to get around the new CCCFA rules.
Shopping around could yield a good payoff for the many tens of thousands of people in particular who have some $170bn worth of mortgages at fixed rates which are coming up for rate resetting in the next 12 months.
For additional information on the economy, housing market, and interest rates, you can subscribe to Tony’s free weekly Tony’s View publication at www.tonyalexander.nz