A personal loan is a monetary loan you can get from a credit provider such as a bank, credit union or online lender – usually for a specific life purpose like renovating your home, paying for a holiday or consolidating several smaller loans. Lenders approve personal loans by evaluating your creditworthiness.

When you enter into a contract for a personal loan, you typically receive money in a lump sum and agree to repay the lender back the money in regular instalments over a specific length of time.

You also pay interest on the amount you borrow, and in some cases, fees and other charges. These interest rates, fees and charges can vary from lender to lender, loan to loan and borrower to borrower.

How do personal loans work?

If you’re considering a personal loan, you should become familiar with some of the details, including how much you can borrow, how to apply and how much they cost. Here are some of the main concepts to remember:

• The amount you can borrow. Personal loan amounts can be very small or very large. We’ve seen lenders offer loans as little as $500 and as large as $70,000.
• The application and approval process. You can apply for some personal loans online in a matter of minutes and be approved (or denied) just as quickly. With others, you may have to visit a branch and it may take days for the approval process to complete.
• The cost. On top of requiring you to repay the loan amount, lenders make their money by charging you in a number of ways. These may include interest on the loan, as well as fees like an establishment fee, monthly fees, late payment fees and early discharge fees. Your specific combination of charges will be described in your contract.
• The loan term. This is how long you’ll be paying off the loan. We’ve seen loan terms as short as 3 months or as long as 7 years.
• The amount of repayments and when they are due. Your loan amount, interest rate and loan term will be set in advance, so it’s easy for the bank to calculate exactly what your regular payments will be and when they are due.

Types of personal loans

Here are the main types of personal loans you may encounter:

• Unsecured personal loans. Your standard personal loan you can use toward various life projects like a holiday, home renovation or medical bill.
• Car loans and other secured loans. A personal loan where you offer up an asset as collateral in case you can’t make your payments. This collateral is officially known as the security. Take for example a car loan, where the purchased car serves as security that the bank can repossess if you can’t make your payments
• Debt consolidation loan. A special type of personal loan you would use to pay off several smaller loans.
• Line of credit. A personal loan where a specific amount is available for you to borrow, but you don’t have to borrow it all. You only pay interest on the amount borrowed.
• Quick cash loan. A personal loan that doesn’t have a strict acceptance criteria so that people with lower credit scores can get the loans they need. These often come with higher interest rates and fees.

How much do personal loans cost?

The cost of personal loans will differ from person to person and loan to loan. A large part of this comes down to your creditworthiness. For example, someone with a higher credit score and a more positive borrowing history will often pay less for the same loan than someone with lower marks.

Here are some factors that will determine how much you’ll pay:

• Interest rate. This the percentage your debt will increase every year. Most personal loans will charge an interest rate. The Australian Securities & Investments Commission has capped interest rates at 48% but we’ve seen rates as low as 5.75%.
• Fees. Many loans will also charge fees on top of the interest, such as a one-off establishment fee to set up the loan or even monthly fees. Some very small loans might do away with an interest rate altogether in favour of one set loan fee.
• Comparison rate. This is simply a loan’s interest rate when fees are factored into it. Since not all loans charge the same fees, this comparison rate makes it easy for you to compare the loan cost of several loans side-by-side.
• Length of loan. Since your interest rate adds to your balance each year, the longer you have your loan, the more you’ll end up paying in the long run (all else being equal).
• Amount borrowed. Generally speaking, the more you borrow, the more you’ll end up paying for the loan.

How do you apply for a personal loan?

1. Decide how much you want to borrow. Work out how much money you need for your holiday, home renovations, debt consolidation or whatever personal project you need the funds for.
2. Work out how much you can afford for payments. Use a loan calculator to work out how long you’ll need to pay back the loan, based on how much you can afford to pay back per month.
3. Compare personal loan options. Identify a few lenders with loans that meet your criteria from the first two steps.
4. Gather your paperwork. Gather together any paperwork the lender asks for. This may include ID, bank statements and proof of address.
5. Apply. You can apply for most personal loans conveniently online.

Does applying for a personal loan affect your credit score?

When you apply for any loan, your credit score can dip slightly. However, with New Zealand’s Comprehensive Credit Reporting system, regular on-time payments can help your score go right back up.

Some lenders will advertise something along the lines of “free rate quote that won’t affect your credit score.” This means they will quote you a rate based off of basic info like your income and the amount you want to borrow – without doing a credit check.

But this is not the same as applying for the loan. If you want to apply for the loan based on the rate quoted to you, you will usually have to go through a credit check and your score may dip as a result.

Who should get a personal loan?

You should only get a personal loan if you have a specific purpose in mind for the money: to help pay for a special project, purchase or life event, or to help out in a time of emergency.

Taking out a lump sum without any real purpose for it could lead you to squander it and end up with a large debt with not much to show for it. For regular ongoing purchases you plan to pay off regularly, you could consider a credit card instead.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual or business. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

The post What is a personal loan? appeared first on Credit Simple NZ.

Comparing credit cards the right way can be rewarding, because there’s a credit card that can cater to almost every lifestyle and financial need.

When you compare, you’ll be looking at everything from interest rates, to reward programs to promotional offers to fees.

Compare credit cards by type of card

Since you probably already know that closing your accounts too often can hurt your credit score, we hope you’ll keep your card for some time. That’s why it’s important to choose the type of card that’s right for you – so you can enjoy its lifestyle benefits for time to come.

Here are the main types of cards:

• Reward credit cards. Cards that let you earn points you can redeem for gift vouchers, merchandise, travel, cash and more. These are great for people who pay off their credit card every month (so as to avoid interest).
• Frequent flyer credit cards. A type of rewards card that works with your airline’s frequent flyer programs to supercharge your points accumulation. These are great for people who fly a lot and who pay off their cards every month.
• Low-rate credit cards. Cards that charge a lower interest rate on purchases compared to most other cards. These are great for people who occasionally carry a balance, such as at Christmas time.
• No annual fee credit cards. Cards that don’t charge a yearly fee just to carry them. These are great for people who don’t use their card a lot or who keep their card mainly for emergencies.

Compare cards by interest rate and fees

Once you know what kind of card you want, you’ll want to find out how much it will cost you. Costs usually come from:

• Interest rate. The percentage your debt or balance will grow per year. Go for a lower interest rate if you think you’ll often carry a balance from one month to the next.
• Fees. These may include annual fees, cash advance fees, international transaction fees, additional cardholder fees and late payment fees. The fewer fees the better, although annual fees are sometimes unavoidable for certain types of cards like rewards cards.

Compare by the promotional offer

Depending on how you want to use the card, you may want to consider any introductory offer that comes with a credit card. Here are some of the most common:

• 0% purchase rate. These cards charge 0% interest on purchases for a limited time, such as 6 months or a year. This might be a good option if you plan to make a lot of purchases at once, such as at Christmas time or before a holiday, and could use a few months to pay it off.
• 0% balance transfer. These cards charge 0% interest, up to a certain amount and for a limited time, on existing debt you transfer over from other cards. These are good for people who want to consolidate debt from multiple cards and have a plan to pay it all off by the end of the promotional period.
• Extra rewards or points. Some rewards cards will offer extra rewards or points just for signing up. For example, a travel card or frequent flyer card could offer a free domestic flight or a rewards card could offer 10,000 free bonus points.
• Waived annual fees. Some cards will temporarily waive the annual fee, such as for the first year.

Compare credit cards by their perks

Many cards will come with additional perks that are also worth keeping your eye out for. These can include:

• Free travel and medical insurance
• 0% foreign transaction fees
• Airport lounge access
• Concierge services
• Purchase protection and extended warranty
• Retail partner discounts
• Hotel status credits
• Event tickets

Bottom line

Conducting your credit card comparison the right way is important for a number of reasons. It can keep you from paying too much for your card and it can ensure that you enjoy valued perks, rewards and lifestyle benefits on an ongoing basis.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

The post How to compare credit cards the right way appeared first on Credit Simple NZ.

The post Debt consolidation loan vs. balance transfer credit card – which one to choose? appeared first on Credit Simple NZ.

Want a more efficient and effective way to compare home loans? Just follow these steps:

1) Identify the non-negotiable features you need.

Google those features and shortlist the banks that offer them. Forget about the others, as there’s no reason to spend time of offers that don’t suit your needs.

Learn here about all the features you might need.

2) Narrow your list even further by looking at the comparison rates.

The comparison rate is a government-mandated rate that lets you quickly compare home loans side-by-side since it incorporates the impact of fees into the interest rate. We’ll look at fees and interest rates later but for now, the comparison rate makes it easy to weed out unfavorable loans.

3) Research each loan’s interest rate, fees and other features.

List your new loan options from step two in a column and put three headings across the top:

• Actual interest rate. This is how much your debt will grow each year. The lower the better.

• Fees. There are dozens of possible fees (think “application fee” and others). Look for options with lower and cheaper fees. Learn all about home loan fees here.

• Comparison rate. The effective interest rate after fees are factored in.

• Features. All options on your list will contain your non-negotiable features. This list is for other features you may find useful.

You’ll now have a table where you can fill out the relevant details. So get filling!

4) Talk to the banks.

It’s a highly competitive market, so call all the banks on your list and try to negotiate a better rate, citing lower rates you’ve found elsewhere.

See if they’ll drop fees that other banks don’t charge or that don’t seem relevant.

If they agree, ask them to quote you a new comparison rate – then plug that into your table.

If you’re not the assertive type or you find this too time consuming, you can always talk to a home loan broker to help negotiate with banks on your behalf.

5) Sort by comparison rate.

Look at the banks that have the best rate and then consider if you feel comfortable taking out a loan with them.

This is where you can take soft traits into account:

• Do you feel more comfortable with one of the big 4 or are you OK with a smaller bank?

• Did you establish rapport with the loan officer?

• Do you find any of the other features from your table useful?

• Do you like the look and feel of the lender’s app and other online tools?

That’s all there is to it

Comparing home loans doesn’t have to be complicated, but you do have to be thorough. As long as you do the research and stay organised, you should be able to home in on the right loan for your needs.

Once you do, the next step is to fill out your application.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

The post How to compare home loans appeared first on Credit Simple NZ.

Most home loans come with their share of fees. Don’t fret over the length of this list, as you probably won’t be subject to all of them. You may even be able to convince your lender to nix a few.

It’s also not an exhaustive list as every lender has its own fee schedule.

Without further delay… your list of the most common home loan fees you might see:

Upfront fees

These are one-off upfront fees you may encounter at the beginning of the home loan process. They may include fees to your lender and to interested third-parties like the government and your solicitor.

Upfront lender fees

• Application fee. Also be called an establishment fee and it pays for the lender to organize your loan whether you settle or not. Some lenders will waive this fee.
• Valuation fee. Pays for a qualified independent valuer to assess your home’s value. Some application fees may cover this up to a certain amount, with you paying any difference.

Upfront government fees

• Stamp duty. A percentage of the total cost of your property, which goes to your state’s revenue department (percent varies by state). It’s more of a tax than a fee.
• Mortgage registration fee. Pays the state to register the purchased property as the security on the home loan.

Other upfront fees

• Conveyancing fees. Fees paid to your solicitor or conveyancer (if you choose to use one) to help you prepare and organise your contract.

Ongoing fees

These are regular, ongoing fees you may have to pay your lender throughout the life of your loan.

• Monthly service fees. A regular monthly account-keeping fee.
• Annual fees. A yearly fee that usually only applies to package home loans, which are home loans bundled with other financial products.

Exit fees

These are one-off fees you may have to pay when you pay off or close out your loan.

• Discharge fee. Also called a settlement fee, this applies when you close out your loan (ie, pay it off, sell your property or refinance).
• Early-repayment fee. A fee for paying your loan off early. It usually only applies to fixed rate loans but not variable rate loans.

Special fees

These are fees you might have to pay if you’re taking out a special type of loan, like a fixed-rate loan or low-deposit loan.

• Rate lock fee. A special fee to lock in your rate with a fixed-rate loan.
• Security guarantee fee. A special fee that applies when you have a guarantor on your loan.
• Lenders Mortgage Insurance (LMI). An insurance premium that applies when you take out a low-deposit loan (usually under 20% deposit).
• Redraw fees. Apply when you withdraw funds from a loan account that you’ve made extra repayments into.

Bottom line

Fees are a fact of life, especially for a financial product you’ll carry with you for a long time. It’s important to become familiar with this list before you start researching home loans. That way you won’t be caught off guard when you do come across these fees in your search and you’ll know what you’re talking about when it’s time to negotiate your loan terms.

The information in this blog post is general in nature and does not constitute personal financial or professional advice. It is not intended to address the circumstances of any particular individual. We do not guarantee the accuracy and completeness of the information and you should not rely on it. Before making any decisions, it is important for you to consider your personal situation, make independent enquiries and seek appropriate tax, legal and other professional advice.

The post Home loan fees you may encounter appeared first on Credit Simple NZ.

Don’t believe you have to have a credit card. Paying interest sucks. It sucks the lifeblood out of your finances. That’s because unless you clear your entire bill within the interest free days, you pay interest.

That interest means you’re paying as much as 22.95% more than your mates at the mainstream banks for the same things, which has a detrimental effect on your finances over time.

Other (cheaper) ways to pay

Thankfully there are way more credit-free ways to pay than ever before that are far better for your bank balance. Here are some of the options:

Debit card. One of the arguments for needing a credit card is the ability to shop online. All banks now offer either Mastercard or Visa debit cards. They look like credit cards and can be used anywhere that displays the Mastercard or Visa logo, but you can only spend your own money, not credit.

EFTPOS. We all know how EFTPOS works. Now you can pay online with just an EFTPOS card through some banks at a number of etailers such as MightyApe, BurgerFuel and Smith & Caughey’s department store by choosing “Online EFTPOS” as your payment method at the checkout. A text is sent to your online banking and you approve the payment. The first banks to offer this were ASB and The Cooperative Bank. find out where you can pay with online EFTPOS visit Paymark’s website here.

POLi and account2account. Both POLi and account2account are payment methods that take the money direct from your bank account. Your payment is approved immediately. You can use POLi and account2account to pay online for goods at The Warehouse, Bunnings Warehouse, Xero, NZ Transport Agency, Air New Zealand and others. Despite the fact that this payment method is widely used overseas and offered here by trusted companies, New Zealand’s banks say that it’s not secure and users are breaching their terms and conditions if they pay this way. In the UK regulators forced banks to make customers’ data available to them, meaning they can use this type of payment system without fear.

Ping it. In the old days we did bank to bank transfer or paid cash for Trade Me purchases. Then Trade Me brought in Pay Now, which required a credit or debit card. Now they’ve added Ping. This allows you go pay with credit, debit, or straight from your bank account. The advantage of this is you only need an EFTPOS card to do it. The disadvantage is you are setting up a direct debit agreement with Trade Me and not all members are comfortable with that.

Pay later. Trade Me and other retailers are starting to offer buy now pay later schemes. You buy now, receive the item, and make interest-free payments over several weeks. Laybuy.com, PartPay and Trade Me’s Afterpay all offer this. The problem is if you miss a payment the charges can prove more expensive than interest. Non-payment can also put a black mark on your credit record.

Pre-paid travel cards. Pre-paid currency cards such as Loaded for Travel, OneSmart and Cash Passport work like debit cards when you’re travelling overseas. The catch is that you pay fees and commissions that make this an expensive way to spend.

PayPal. This online payment method that you can load up and spend with isn’t used all that often in New Zealand. If you’re buying from eBay and overseas stores you might find having a PayPal account useful.

Bitcoin. You can pay for a growing number of real life purchases using your Bitcoin wallet. I do own a very small amount of Bitcoin and look forward to the day when I can spend it and bypass my bank’s fees.

Cash. What’s that you say? Sometimes ditching the plastic and spending cash is the most sensible option. Take it out at the beginning of the week, split the money between envelopes for different purposes such as shopping and entertainment and once each envelope is empty just stop spending.

There are other forms of payment coming on. For example Apple Pay has made it to New Zealand in a limited way and Alipay is on its way. However payments from both are connected to your debit or credit card so aren’t in effect changing the way you spend.

Of course credit cards do have uses when you have an emergency. But everyday things such as buying groceries or school uniforms aren’t emergencies. They need planning for.

The post Using a credit card for everything? There are other ways to pay appeared first on Credit Simple NZ.

Watch out! Your credit score could soon affect the interest rate you pay. That’s good if you’re a “unicorn” with a credit score from 801 to 1,000, and not bad if you’re a “thoroughbred” with a score of 601 to 800.

If, however, you’re a credit “donkey” at the very bottom of the credit score pile, a credit pony at 201 to 400, or a farm horse from 401 to 600 you could well pay more.

Why donkeys pay more thanks to their credit score

That’s because New Zealand lenders are turning to a new style of “risk-based pricing”. That means they offer different rates to customers depending on how bankable you are as a borrower. Here’s what you need to know:

• It’s new. Risk-based pricing is new in New Zealand. In the past “negative” credit scoring only measured you on your defaults. The government changed the rules to allow “positive credit reporting” that takes into account your payment history. The data enables lenders to make better judgements about whether we’re more likely to pay or default.
• Who’s offering it? Peer-to-peer lenders such as Harmoney do this, says Steve Brown, director of bureau engagement at illion. If you want to borrow money from a peer-to-peer lender you’ll be rated from A-E according to your credit score. It’s very much the norm now globally for banks to price according to credit scores, We are just a little behind in this downunder. The Co-operative Bank was one of the first (if not the first) banks to offer risk-based pricing in New Zealand. It reduces interest rates, for example, if you have your main income paid into your everyday account. That makes it safer for the bank to lend to you.
• Why do it? Lenders want to attract the best borrowers who they know will pay the loan back without being chased. By offering lower rates to the unicorns and thoroughbreds banks and other lenders reduce their risk. It’s also a marketing tool to attract better customers. Likewise if they can see from the positive credit reporting data that you have an adverse credit history they can charge more. It’s only a matter of time before credit card interest rates are based on your credit score as well.
• What about mortgages? Sooner or later you’ll be offered mortgage rates based on your credit score, says Brown. It already happens informally. Banks are sometimes willing to knock a few points off their mortgage rates to gain or keep a good customer. Conversely, borrowers with less than sterling credit scores sometimes have to go to second tier lenders such as finance companies to get a mortgage at all. Typically the rates will be higher than banks offer.
• Wait, but my credit score sucks. As with mortgages, there is already an informal system that means borrowers pay more if they’ve had debt disasters in the past. Kiwis with really poor credit scores may not be able to borrow from the bank or credit union at reasonable rates and be forced to go cap in hand to finance companies. For the very worst credit scores the only choice may be payday lenders that charge exorbitant rates of interest.

Never fear. CreditSimple is here with some good advice even if you have sabotaged your own credit score. You can get yourself ready for risk-based interest rates by cleaning up your credit score now.

How to get better loan pricing

Start by checking your credit score right here on Credit Simple. You’ll also get some of your key credit history (just click on the ‘credit file’ tab once you’ve accessed your dashboard). Then get your full credit record by ordering your report from the three agencies illion, Centrix and Equifax. Remember that there’s always a free option – you don’t have to pay, you just need to wait a little bit longer. Go through your report with a fine tooth comb. If you think any entries are incorrect or unfair, contact the bank, finance company, or other credit provider such as utility companies  and ask for them to remove these.

The next step to cleaning your credit record is to pay off any debts that have led to defaults. Ask the credit provider to remove the default once you have.

Finally, start paying each and every bill on time including your rent if you’re a tenant. If you need to start no excuses budgeting to ensure this happens, do it. Every single payment is a positive mark on your credit record and soon you’ll be moving out of donkey territory and becoming altogether more desirable to lenders.

The post How your credit score affects the interest rates you pay (and welcome to the brave new world of risk-based pricing) appeared first on Credit Simple NZ.

Do you like baked beans? Unless you want to be eating student grub for the next few years it’s a good idea to figure out how much house you can really afford.

Don’t be fooled by what the banks tell you that you can borrow. It’s not the same question. Can you really afford the repayments? Really? The banks’ calculators don’t always take into account all the other things you have to pay for when you’re a home owner.

What they do is crunch a minimum monthly surplus that the average person has after living costs are deducted. Who’s to say your spending patterns are “average”. What’s more, this “uncommitted monthly income” (UMI) calculation varies from bank to bank.

Every home buyer needs to do his or her own number crunching. The banks’ computers can’t predict that you’ll be dropping to one income when babies come along or, on the other side of the coin, that you’ll have an extra $1,000 a month earnings from Airbnb for a spare a room or sleepout you plan to let.

Here are some of the ‘what can I afford’ tricks and traps you’ll need to consider before signing on the dotted line of those mortgage documents:

Trick: Write yourself a monthly housing budget and compare it against your current spending. It’s often said that you shouldn’t be paying more than 40 per cent of your gross household income in mortgage payments. Make sure your budget includes repairs and maintenance, rates, water, utilities and insurances including house, contents, life, income/mortgage protection. Don’t forget to build in a buffer to cover for unexpected expenses such as insurance excesses.

Trap: Small deposits mean higher fortnightly or monthly mortgage payments. Bigger really is better when it comes to deposits. You’ll also find you become more attractive to lenders the larger your deposit gets.

Trick: Try living on your house budget for a few months to see if you can really afford to take the plunge. If you’re struggling every single week to make ends meet you might want to juggle your budget. Can you buy a more modest house?

Trap: Apartments are often way cheaper than other types of properties to buy. But most banks are nervous of lending on apartments and require bigger deposit than they do for standalone houses or home units. What’s more you’ll need to pay body corporate fees and sometimes leasehold charges on an apartment. Having said that, these fees reduce the amount you pay in maintenance because you only need to pay for work on the inside of your home not the outside.

Trick: Boost your income. Moonlight, sell stuff, start a business, rent your spare rooms to students, boarders or flatmates, get a promotion, babysit, sign the children up as actors or models, or simply spend less. Make a game of choosing not to buy things you’ve convinced yourself you “need”. That frees up more money for mortgage payments.

Trap: Some people fail the banks’ UMIs, but can in reality afford the mortgage. They might be the type of people who live on the smell of an oily rag and can prove it with their bank statements. It’s a really good idea in this situation to use a mortgage broker. Brokers (aka advisers) know how to overcome such road blocks.

Trick: Interest rates can rise and fall. It’s best to do your numbers on rates that are a fair chunk higher than currently. Someone who is really cautious might want to add two percent to the current rate. That way you’ll be sure you can stomach an interest rate rise, which will come eventually. Twenty five years is a long time and rates won’t always be at five per cent or below.

Finally, happy house hunting.

The post Trick or trap: How much house can you really afford? appeared first on Credit Simple NZ.

Mortgages in Auckland are not small. The average one is $393,000 and a quarter of them are at least $500,000. When you owe that much money you want to know things are going to be okay: that your property values will stay up, that your interest rates will stay down.

But the truth we come to know quickly in the credit rating business is that unhappy surprises have a habit of turning up. These post-GFC times have given us some very low interest rates. It’s possible they’ll stay low for some time. But it’s one thing to be a possibility, another to be certainty. Financial prudence says you need to ask: what if interest rates start making their way up?

Let’s say you’re already paying nearly half your income on your mortgage at the current rates – and we know that many people are – what are your options then?

Bill English, in Washington last month, raised the possibility that interest rates could rise. He talked about central banks around the world taking a fresh look at interest rates, given that low rates don’t seem to be having the stimulating effect on the economy they earlier had been. He says they see the possibility of interest rates making their way back up.

But when? He couldn’t say, and in fact no-one can for certain, and that’s what can make a career in the financial markets so fascinating and lucrative. A single event can create a multitude of uncertainties. The election of a new president could take rates in one direction, these earthquakes might take them in another.

But out in the real world of mortgage payments, it comes down to something simpler: “If, or when, it comes, can we afford a rate rise?”

If your rate lifts by two percent, the monthly cost of that won’t be trivial. On a half-million dollar mortgage, the extra monthly interest cost alone will be around $800. On a million dollar mortgage, it’ll be around $1,600 a month. Two per cent might sound like a lot but bear in mind the 10-year average for interest rates sits at 6.7 per cent.

No one wants to be a merchant of doom. But in our business, we know that the more clear-eyed you are about your financial position, the more stable your position will be when bad news blows in.

If this talk about rising rates worries you, what options do you have?

In our business, we don’t just offer people a credit rating, we also try to help them improve their financial position. What we often find is that people aren’t alway as open to changing their overall circumstances as it might suit them to be.

We may tell some people, for example, that they may imagine that their job prospects are best in Auckland and they can’t realistically consider any alternative, but that actually their track to better financial health might take you along roads they hadn’t considered. Maybe that road might take them through Gisborne or Invercargill.

But if that’s really a bridge too far, we have a couple of other suggestions: Maybe avoid adding to the mortgage to fund lifestyle/house extensions/spending money right now. If a rise in rates might mean that some months or years from now you’ll struggle to pay your mortgage, leading to a default and a negative impact on your ability to borrow later in life, throttle back, for now.

At the very least we’ll tell them to be looking for a better rate. You’d be surprised how keen the other banks may be to take your call right now.

The post Will the sun always shine on your mortgage? appeared first on Credit Simple NZ.

Do we have decent competition in the mortgage market here? Are the banks as ready to sharpen their pencil as they across the Tasman? Looking at the numbers, you might wonder if we're being taken for a bit of ride. New Zealand’s banking base rate – the official cash rate – is 1.75% and until recently was 2%. Australia’s is 1.5%. So yes, you might expect the mortgage rates in Australia to be a little bit better than New Zealand. But this much?

At today’s date, November 29, www.loans.com.au are offering 3.39% variable. The best rate you’ll find on offer at advertised rates in New Zealand is currently 4.29% on a two-year fixed rate from New Zealand Home Loans. Looking over the spread of rates at www.mortgagerates.co.nz, the numbers range from the mid fours to the low sevens.  We asked business commentator and Hive News Publisher Bernard Hickey: are New Zealanders are being taken for a bit of a ride? Does Australia maybe have more lenders and keener competition, and do people get a better mortgage deal here than in New Zealand?

Business commentator and Hive News Publisher Bernard Hickey

“One of the differences is that the Australians tend to do floating mortgages and we tend to do fixed,” Bernard says. “So to compare apples with apples really you have to look at New Zealand fixed rates versus the Australian floating rates.”

The Australian floating rates are the best deals on offer, Bernard says. In New Zealand the fixed rates tend to be the best deal.

Okay, but on that basis, the best advertised New Zealand deal we could locate today was 4.29%. The best Australian was 3.39%. Doesn’t that at least suggest the banks might be taking advantage of a lack of competition here?

“I think there is bit more competition now than there was a year or two ago, ” Bernard says. From about 2003 to about 2009 “Kiwibank really competed hard to try and win market share off the other banks and force the mortgage market share wars, which actually brought down net interest margins quite a lot.

“From about 2011 onwards – because New Zealand Post and the Government didn’t want to put a lot more capital in – Kiwibank dialled back on the competition.

“So the bank wasn’t quite as competitive between 2011 and 2015. But in the past two years until about 3 or 4 months ago, the banks were getting a lot more competitive and driving interest rates down. That’s one of the reasons why particularly last year you saw lending growth pick up, because the banks were competing quite hard.”

Bernard says the big banks lending interest margins have actually dropped a bit in the last year or so for a couple of reasons:

1. New Zealanders have shifted from expensive floating rate mortgages to cheaper fixed rate mortgages.
2. The funding costs – how much it costs the banks to borrow money on term deposits and wholesale money markets overseas – have got more expensive.

 

“I wouldn’t say that the New Zealand banks are taking us for a ride at the moment. I think they’re trying to increase their interest margins. That’s because they are starting to see the gap opening up between how much money is being lent out and how much is being put in term deposits. In theory the banks they get money in through the front door in term deposits and then they lend out the back door as mortgage lending.”

Ever since the global financial crisis, he says, that money in the front and in the money out the back has been broadly the same, so a bank didn’t have to go overseas to top up. “But the past 6 to 12 months suddenly we stopped saving so much in term deposits and meanwhile the lending growth has substantially increased.”

Why has the saving stopped? He points to a combination of things: baby boomers buying rental properties, owner occupiers doing more renovation, people going on holidays and other spending.

“And also a bunch of people have seen they can get more growth by going for the capital gains. So they have pulled their money out of deposit and bought rental properties and geared up.”

So the banks now have a bit of an issue, he says, and their solution is: offering more in term deposits and “closing the back door for a little bit” by not passing on further rate cuts. If you’re looking for the rates they get in Australia, you might be waiting a while.

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