Advising clients in a changed mortgage world

Patel, who owns and runs Mortgages Online, says the market is probably not pleasant for some advisers, particularly those who have entered the sector in the past three years and only experienced interest rate drops.

“Even the past 10 years have had a slightly rosy picture. Of course, Covid was a rollercoaster emotionally and psychologically but interest rates still went down and fast. The rise has been equally as rapid,” he says.

“Any government printing money at the rate the Labour Coalition Government did to protect people against job losses and keep businesses afloat during the pandemic can only lead to inflation and eventually higher living costs.”  

This year about 54% of fixed mortgages will rollover to higher interest rates making it difficult for clients in the midst of a cost-of-living crisis.

Patel says after two years of speculation, some advisers think they should recommend how long to fix. “That has never been part of our life – that is just an assumption that has been built in.”

In 17 years of mortgage advising, Patel has never recommended how long clients should fix their mortgage interest rates for. He goes through details with them and instead says how long they should not fix for, based on scenarios such as selling down, trading up or similar.

A level of uncertainty is always prevalent in the mortgage market and Patel says it is his job to tell clients.

“If a client says, ‘I will leave you to sort it out’ when refixing, my advice is always to fix one half of the mortgage for one year and the rest for three to five years. Any term a client thinks is too long sets the boundary for the longer term part of the mortgage, but we always split it 50/50. I don’t know, and have never known, what interest rates will do and I have used the same strategy for 17 years,” he says. 

Patel believes advisers, in general, could be more mature in their approach and tell clients they’re not expected to know what interest rates will do.

“When the client leaves it up to us to sort out fixed terms and there are no other factors, we will hedge it and say fix some short and some long.

“We ultimately leave it to the client to come up with the exact numbers but we make them aware it is their call and half the time it might be wrong over a 15-year term. But it’s tolerable because nobody gets rich from making the right call on interest rates. People get rich by keeping property long-term.”

He tells younger people with good incomes relative to their home loan it is acceptable to make a call whether to fix one, two, three or four years because they have a big enough time horizon to get the bets wrong and right. Those approaching retirement will probably not get the same advice.

“If they fix for three or four years it is unlikely they will have enough time to average out the bet,” he says. There is a little bit of guidance, but ultimately we make the client aware the level of uncertainty varies.”

Visibility also helps clients moving from a lower to higher rates. If they know 60-90 days they can start digesting and planning, he says.

Clients managing so far

In light of the cost of living increases, he is surprised how many mortgage holders in his 800-client base can afford to pay the higher rates. Generally Mortgages Online refixes between 400 to 200 mortgages depending on term length. In the past two years less than five mortgage holders have had to talk to their banks’ hardship teams. He says over time clients have had reasonable pay rises.

Centrix data shows a 26% rise in households behind on mortgage repayments over the past eight months. The Reserve Bank financial resilience statement says there have been limited signs of distress in banks’ lending portfolios reflecting  ongoing strength in the labour market and borrowers adjusting their spending or using savings and repayment buffers. However, cash-flow pressures on households are growing and buffers are likely to be tested.

Patel is finding clients  are more open to fixing longer mortgage terms. “It’s a no-brainer because longer-term interest rates are lower, but surprisingly still the majority are fixing for one or two years in spite of what has happened with OCR rises.”

They sometimes think interest rates will drop in a year and he reminds them that is not a given.

Patel says everyone grumbles about the interest jumps but he tells them home ownership is a long-term game.

“The days of saying owning a house is cheaper than rent, let’s buy, were unique and not the average long-term situation. One person’s salary would go on the mortgage and we are back to those days.”

He says the industry has gained maturity since he has been in business with more tools, regulations and expense, and cowboy advisers have disappeared.

“However, the new regulations are pretty heavy handed. It’s to be seen how they play out.”