ANALYSIS: If your home loan has come to the end of its fixed term and you’re facing refixing from a rate about 2.5% to one more like 6.7%, it might sting a bit.
But spare a thought for those borrowers who are now facing much higher rates.
Here are some of the ways that people are facing interest rates near double-digits, in some cases.
Low-equity borrowers
If you bought a house recently using a small deposit, and its value has either fallen or not moved, you face a double blow.
In this situation, borrowers usually do not qualify for banks’ “special” home loan rates, and they are also often charged a low-equity fee or premium on top.
How that works depends on which bank you are with – some charge an upfront, one-off fee. Others apply a margin to the interest rate.
The extent of that depends on how small your deposit is. Someone with a 10% deposit could face an extra 75 basis points being applied to their home loan rate. At the moment, that would mean a standard interest rate of 7.39% for two years, plus 75 basis points of margin, taking them to a total rate of 8.14%.
Between January 2020 and October 2021, when the official cash rate started to lift, there was about $15 billion in home loan lending done via more than 31,000 loans to people with equity of less than 20%.
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When house prices are rising quickly, buyers often plan to have their properties revalued in the future to have the margin removed and allow them to access better rates. But when the market turns, as it has since 2021, that strategy becomes less possible.
Mortgage adviser Hamish Patel, of Mortgages Online, said he had dealt with a few clients in that position.
He said, when the banks were competing hard for business, some had offered low-deposit borrowers their special rates, plus the margin. But then when they came to refix, the bank’s appetite to offer the special was gone and they had to settle for a standard rate.
He had one client who bought a townhouse in Auckland for $1.05 million. But when it was revalued recently, its value had dropped to $950,000. She had a loan of $900,000.
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Susan Edmunds speaks with four mortgage advisers what how best to prepare yourself financially when buying a home.
That left her with limited options, he said. People with 10% or 15% equity could change to a different bank because the loan-to-value rules allowed banks to refinance clients dollar-for-dollar without it counting towards the total low-deposit lending they were allowed to do. But when someone’s equity dropped to 5%, it was virtually impossible, he said.
“Theoretically, ANZ will do 95% but the low-equity fees are large so it makes no sense to do it.”
ANZ’s website notes that when someone has less than 10% equity, the low-equity premium applied is equal to 2% of the loan amount.
“There are people who kind of a year ago thought they might be paying 6% to 6.5% when they refixed – not up near 8% with a margin. That’s surprising.”
He said it was also tricky for those borrowers because shorter-term rates were more expensive than longer fixes, but many were reluctant to lock themselves in.
Another home loan adviser, Susan Templeton, agreed buyers who purchased houses at the peak of the market would be stuck with a low-equity margin longer than anticipated.
“First, ask your mortgage adviser for a desktop valuation to get a fix on where you stand. If that doesn’t fly, you can pay for a registered valuation and hope for the best. It’s worth having a conversation about your timing and current market trends. If you have the means, consider paying down your mortgage or upgrading your home to raise the value, or changing banks. Each option has potential consequences.”
She said borrowers should talk to a mortgage adviser who understood their financial position and goals.
Second-tier lenders
Glen McLeod, from Edge Mortgages, said he was also seeing people running into trouble with second-tier, non-bank lenders.
He said they were often used by buyers whose businesses were affected by Covid and did not have the financial history to get a traditional home loan.
“Fast forward to where we are now and sadly interest rates have increased and with the second-tier providers if they were on a fixed rate at the time they are coming off with interest rates being in the late 9%, early 10% range. This is indeed causing financial stress particularly if they are on principal and interest based lending.
“We have a number of cases been able to refinance the client back to the mainstream however there are cases where it is not possible. This is due to either the value of the property reducing or income to service not working because of the increase in the serviceability rates with the mainstream banks.
“In these cases what we’ve had to do is apply back to the existing provider to see if we can get an interest only payment regime put in place. This is to give a small reduction and payments over the next 12 to 24 months.”
Source: i.stuff.co.nz