KEY POINTS:
Investors and homeowners alike are staring down the barrel of double-digit mortgage interest rates and it's starting to hurt for some.
About 30 per cent of fixed-rate mortgages are due for renewal over the next year. Put the two together and they mean double trouble for homeowners who
also own investment properties.
Many who have bought their investment properties in the latest boom are "negatively geared" meaning the rent doesn't cover the mortgage and outgoings. The typical negatively geared investor is paying about $80 to $100 a week to top up their mortgages after the depreciation and tax breaks have been taken into account, says Brendon Newport, mortgage broker at Gillies Group Financial Services and Capital Property Investors Association vice- president.
It's not uncommon for a home owner with one suburban rental property to owe $500,000 in mortgage debt. A 1.5 per cent interest rate rise, which many borrowers are experiencing, translates into an extra $7500 a year to pay on such a debt, which can cause problems if rents already aren't covering outgoings.
There is only anecdotal evidence about the current level of mortgagee sales and disagreement over whether the numbers are rising.
Mortgagee sales, says Bryan Thomson, chief executive of Harcourts, are the emotional end of the market and no one will ever know how many homeowners are putting properties up for sale themselves because they can't afford to pay the mortgage.
Certainly the NZ Federation of Family Budgeting Services is seeing people in financial trouble as their fixed-rate deals come up for renewal. This is especially so for people on 100 per cent mortgages, says chief executive Raewyn Fox.
Floating mortgage rates hit rock bottom at 6.62 per cent in February 2002 according to Reserve Bank figures. The difference between the current floating rate at 9.8 per cent and that low for the current decade adds $795 a month to the cost of a $300,000 mortgage.
"Often shocks like this can be good for people as they can reassess their whole situation and find areas where they are wasting money or spending it in an inefficient manner," says Stuart Wills, mortgage broker at Mortgage Link West.
At a basic level, says Fox, homeowners and investors ought to be checking that they're getting all they're entitled to such as the Working for Families tax package. Some may not realise they're entitled to money because their salary is too high, whereas once any "losses" on rental property are taken into account their income is much lower on paper.
Often, says Fox, a change in the mortgage interest rate is what brings clients into her organisation, but the real problem is other debt, in particular motor vehicle debt and hire purchase, which causes the real problem.
"The biggest issue is the cars because you pay such a lot for them over a five-year period of paying off interest and they devalue so quickly."
Refixing the mortgage isn't the only answer to those who are starting to find themselves in difficulty making payments on their properties.
Each case is different. Jeff Matthews, senior financial adviser at Spicers, says one client was struggling to pay mortgages on three properties. He had a $1 million home with a swimming pool in Te Atatu, and two rental properties that, although on 100 per cent mortgages, were just paying their way. Matthews recommended that the client downgrade to a $600,000 family home and keep the investment properties.
In the case of property investors, the first issue to look at when clients are having difficulty with the mortgages is to transfer debt from the family home to rental properties, says Newport. Typically banks don't mind property owners doing this. If the rental properties are held within a Loss Attributing Qualifying Company (LAQC) then the mortgage interest on them becomes tax deductible, which can help ease the burden.
Also reviewing any savings and retirement schemes can help, says Wills. "There are often ways to restructure these so that you qualify for tax rebates."
Another option for those in trouble, says Thomson, is to move to an interest-only mortgage until your situation changes. You will typically pay less because you aren't paying back the principal. "You can also extend the term of the loan and push it out from, say, 15 years to 20, 25 or even 30," and reduce monthly payments that way.
Back in 2004-05 pundits were predicting that mortgage interest rates would rise into 2006 and then start falling. It would appear that they were wrong and those drops may not come for another two years or more. As a result many people got lulled into a false sense of security and racked up too much mortgage debt, says Matthews.
Investors and homeowners looking to fix their mortgage rates for two years in the hope of rates going down by then might be out of luck. The BNZ's Tony Alexander said earlier this month that if he was a borrower he would have no hope of seeing below-average interest rates for a long period of time. "I personally would be willing to take a bit of a punt and fix one-year looking to get a better, but probably still short-term, fixed-interest rate in a year's time."
Matthews says his company's economist, Rozanna Wozniak, believes it will be 2009 before borrowers see any relief on mortgage rates.
David Chaston, publisher of interest.co.nz, said that economists can predict at most two years into the future and anyone fixing a mortgage for longer than this wasn't a good idea.
Some mortgage brokers recommend borrowers split their mortgages into three portions. One fixed for a short period, another fixed for a slightly longer period and the third portion in some sort of revolving credit type account, which meant their debt was reduced each time their wages or salary were paid into the account. Providing the borrower avoided temptation to buy consumer goods on his or her mortgage, revolving credit allowed the mortgage to be paid down more quickly than more inflexible loans.
Says Wills: "We have always recommended splitting a mortgage so that not all of it is ever going to come off fixed at the same time - this strategy is certainly paying off for our clients now."
Even though the long-term rates are slightly cheaper, he adds, in most cases it's currently best to go for shorter terms.
Investors sometimes prefer longer terms because it gives them certainty for a number of years and averts some of the conundrums faced by borrowers.
Whatever your situation, says Thomson, it's a good idea to see a trained mortgage broker who will have access to more options than the big five banks and may be able to help with restructuring loans.
