My Term Deposit rate has just dropped from 3.5% to 2.5% what should I do?

Savers are being punished and are being forced to take action. Remember the search for yield in 2006 when lots of people signed up with the Finance Companies? So let’s not go there again.

There are so many things to think about when investing it isn’t something that can be answered in one sentence, although many people think it can. Nothing is ever a problem until it is. I experienced this first hand in December 2018 when my incoming phone calls spiked, with the question, “what is happening to my money”? If you recall the share market went into correction mode between the end of September and Christmas eve, but recovered in early 2019. It goes to show that people feel loss much greater than gain.

Anyway, one answer is try a mortgage fund or P2P lending. I have two options for you to consider, First Mortgage Trust and Southern Cross Partners. Both have slightly different aspects, but both aren’t as liquid as your term deposit, assuming you have chosen a short term one. If you fundamentally believe in the New Zealand housing market, then you should perhaps consider one or both of these as the rates range from 5% to 7% approximately or around 100% better than a Term Deposit.

The deposit rates could be as low as 1-2% before too long. Imagine how many people will be asking this question and what it will do to the share or property markets.

What can I borrow?

As we have seen in the past couple of weeks, what you can borrow can change in a heartbeat.

Banks have changed their “internal” servicing rate, which means that you might be able to borrow $25,000 or $50,000 more than you could two weeks ago.

This might not seem a lot but for some people, but it might just be the difference between getting the house they want or not.

In addition, lenders use different servicing rates so what one lender says maybe quite different to another.

Finally, some lenders may be looking for new business when you are looking for a loan and others less so. So it pays to know who to pick.

Should I buy Gold?

This topic has been raised its  head again. How many of you have even considered this? Not many I suspect. Why should you buy something that is dug out of the ground and then for the most part put back in the ground in a bank vault?  The answer may sound strange, but it is a form of insurance and is in many people’s eyes the ultimate store of wealth, that can’t be taken away from you. Does everyone like it? No. Warren Buffett, arguably the world’s best investor can’t value it as it has no dividends or income and describes it as purely speculative, which is correct. So you are either a gold bug or you aren’t, but I think it has it’s place in any portfolio and depending upon where you sit the allocation could be anywhere from 4-10%.

Remember you can buy gold in a number of ways; Physical gold, gold mining shares or perhaps an ETF. Gold miners are exciting and add leverage, but can be highly volatile. They can be up or down 5% in any one day.

My bank who I have banked with for many years has turned me down and I am very surprised? Can you help me as I have already signed up for a property?

This is something we hear quite a bit and is becoming more frequent as banks tighten up and start to adhere to their Responsible Lending Code. However, quite often it isn’t lack of equity or cashflow, but simply the property you are buying.

Banks aren’t the best about lending against holiday homes or properties in smaller settlements which may take 6-12 months to sell. They also want to be sure that the property is sound, there is Council code sign off and any remedial works are modest in nature.

Another issue which trips up a lot of people are the words on a bank statement – “unauthorised overdraft fee or dishonour fee”. Banks generally don’t like this as their immediate reaction is “if this person can’t manage their finances, are we going to get repaid”. So make sure there is an alert on your account notifying you when you get down to your last $50, so you can transfer money across.  Banks like to see 3 months “clean” bank statements, so if you have a Blip consult with a mortgage adviser before proceeding with a purchase.

If I change jobs will it affect my ability to borrow?

In short Yes. A lender likes you to be in a new job for 90 days before it will consider lending you any money for a property purchase. If you go self employed, well that is a whole new matter.

Can I get a mortgage if I am over 55?

This has come up quite a few times recently, mainly due to divorce. The short answer is Yes, subject to knowing more about your situation. Lenders will usually look at a maximum loan term of 15 years, which will obviously put pressure on your repayments, so you really should discuss this with a mortgage adviser to check affordability and not put yourself in a difficult position late on in life.

Can I get a mortgage with a small deposit of say 5%

I am pleased to say that there are always new entrants looking to get into the market. Shared ownership is the latest thing. So if you have very good cashflow and also good credit then there is hope. It isn’t for everyone and it is a fairly new product, but it is at least worth considering. I will be checking it out before I give it my tick of approval.

Why does my pre-approval show rates above the market?

This is something that spooks almost everyone. Until you have secured a property, market rates can’t be sought.

Why does my loan offer letter ask for a Registered Valuation this time?

A fair question. Here are two recent instances I have seen;

• If you buy a property privately you will always need to get a valuation no matter what.
• If you buy a property that is being sub-divided then again a valuation will be needed.

Can I use my locked in UK Pension in a NZ pension fund as a security for a deposit?

In short, No. You can access pension monies from age 55 but you can’t use them as security.

Can you re-finance my second tier lender back to a high street bank?

It will come as no surprise the reason behind this question is cost. There are a load of reasons why someone has to go to a second tier lender.

In order to get back to a first lender you need a few things, some of which, will apply and some which won’t, as follows;

• If self employed then you need two years financials which can support the required level of borrowings
• If PAYE, three payslips along with 6 months mortgage history
• Good credit
• Low personal debt- preferably less than $10,000
• A property the bank is prepared to lend on i.e. must have Council sign off

Are my savings going to zero?

In early March the markets were dropping like we were facing Armageddon- down around 35% in less than a month.  This was the fastest drop I think we have ever seen and I believe is right up there with the 1929 crash.  So as you can imagine I received some phone calls.

Some people were checking their balances daily and were scared.  Should I cash out while I still can?  I had to remind people why they invested in the first place and that every 7-10 years you do get a crash like this ( I think we can call it a crash not a correction).  Thankfully most of my clients are in balanced funds, so the drawdown or paper loss wasn’t 35% but nearer 15% at the lows, so not so terrible, but still scary all the same.

People feel a loss twice as hard as a gain.

This must be remembered and if you can’t stomach this then you are; either in the wrong type of investment, aren’t thinking long term or perhaps you just aren’t cut out for this investing game and should have all your money in term deposits and make a measly 2.5% before tax and inflation or in other words zero, if you are lucky.

My advice is simply this;

1. Make sure you are in the right type of fund and understand that you can from time to time face large drawdowns.  Ask yourself, whilst it is fresh in your mind, how you felt about it this time and take the necessary action to make sure you don’t feel it again or else understand that these things happen and learn to deal with it.
2. Diversify as much as possible- Gold, small side business, real estate, different stock markets around the world etc.

Will I have enough money to last me in retirement?

All retirement planning should give you a figure to aim for based upon what lifestyle you are seeking. What I think the last 4 weeks has shown us, is that we have to think about the what ifs much more and make a plan for them, or accept a lesser lifestyle.

So as per the previous questions, whilst the events of early March are still in your mind, make a plan and take action otherwise the scars of early 2020 will slowly disappear and you don’t want to make the same mistake next time. And there will be a next time, there always is.

Can I get redundancy cover?

Yes, you still can, but as you might imagine it isn’t as easy as late last year and it has to sit alongside Mortgage Payment insurance, you can’t buy it as a standalone product. 

As with most insurances, there is a catch, namely, you don’t receive any money for 6 months after redundancy and then the payment only lasts 6 months.  So is it worth it, perhaps, perhaps not?

Maybe a better way is to do two things;

1. To build up 6 months worth of headroom inside of your mortgage i.e. in your revolving credit facility and
2. To have an emergency fund of 6 months of living expenses in case another virus strikes us.

Are house prices going to drop?

There have been various commentators saying the market is going down 10%+ and I guess if enough people believe them, then it is quite possible. The market knows more than me, so I am not going to make any predictions, I will leave that to the experts who have all the data.

However, I have heard of three instances in the past week where buyers have had offers accepted at between 15% & 18% below the list price. Now the list price could have been high, but these sales will find their way into the public records before too long and might start to show a trend.

Do your due diligence before buying. Ask more questions, think about all the what-ifs and if at the end of the process you feel confident, then proceed, otherwise wait and watch.

Can I get a mortgage for my first home in this market?

Interesting that some people are thinking about buying when most are in self-preservation mode, but that is I guess what makes a market.

The short answer is Yes, but there are two very specific questions the banks are asking;

1. What industry are you in?
2. Let’s see your last payslip (they always ask for three payslips but they are very interested to check out if you are being affected by the Wuhan flu)

The other thing I am hearing is the banks are ringing your employer to see if you are still employed! Usually, they will do spot checks, but this is becoming more widespread.

What are the banks doing?

Well three things principally;

They have reduced their internal servicing rate to 6.45%- it was over 7%.  This basically means that so far as the bank’s computers are concerned, you can borrow a bit more.  Please do not confuse this with the actual interest rate of around 2.55-2.65% for 2 year money.

They are asking more questions around how Covid 19 has affected you or your business.  They want to know things such as; did you take a paycut, are you back on full pay and if bonuses are part of your work remuneration, how these have been affected.

They aren’t, generally, being very flexible as they are swamped with new business and currently can afford to take the easiest deals.  If your application isn’t well presented doesn’t tick all the boxes then it risks getting set aside.  The thing they look at the most is sustainability of income, which given the current situation is understandable.

Home Loan Repayment Deferral

This scheme has been extended until March 2021. Whilst this is good news and does provide welcome relief for those who need it, it does mean the interest gets added to the mortgage and so increasing the amount of the loan.

Where you can, keep paying or perhaps consider interest only.

Where to invest?

GOLD?
Perhaps not really a subject on many people’s minds right now, but it is really interesting to see Warren Buffett taking a stake in Barrick Gold.  You may say, SO WHAT, but this is a big deal as Mr Buffett has always said he wouldn’t invest in the yellow metal and here he is changing course, albeit you could say he is investing in Barrick because it is making very good profits right now, not the actual metal itself.  But you must ask yourself why, especially as gold has been on a tear recently and has gone through US$2,000 per ounce.  Is gold the only market that isn’t overhyped or is there something else at play?

If you don’t have any gold, I believe you should get some.  The amount will depend upon your financial position and risk profile.  You can do this by owning physical gold, buying a Listed ETF such as GDX or GSXJ or if you want to go up the risk spectrum, buy some gold miners in Australia.  Full disclosure I own, physical gold, GDXJ and some Australian miners.

CRYPTOS?
This is an area I fail to understand, but in case it does get away from us. It is worth having a small bet.  I am viewing it as such, as it could easily crash and burn, but likewise, some of the “coins” could go up 3X, 5X or 10X. 

I have invested a VERY small amount in Bitcoin, Ethereum and Ripple.

What are the banks doing?

Well, two things principally;

They have reduced their internal servicing rate to 6.45%- it was over 7%.  This basically means that so far as the bank’s computers are concerned, you can borrow a bit more.  Please do not confuse this with the actual interest rate of around 2.5% for 2 year money.

They are asking more questions around how Covid 19 has affected you or your business and I would say are being a bit more cautious in some areas.

I have money in a Term Deposit about to mature, what should I do?

This is now a weekly question so it is worth giving it some attention.

The comment I hear often is I need to do “something” but what does “something” mean?

You need to know what you want, just like going to the Supermarket, you usually know what you are shopping for.

Make plan.  If it is a deposit for a rental then at least you have an end goal.

Maybe you want to buy some International shares or perhaps you want to go back to University and learn a new skill.  Again you must have a plan.

Can I still transfer my private UK pension?

Yes, you can and some excellent values are being quoted for final salary pensions.

Should I buy a property?

FOMO is on us again and people are jumping on the bandwagon without asking themselves why are they doing it.  Just because a friend owns two rentals doesn’t mean to say it is the right thing for you.

Here is what I am hearing, seeing, observing;

The property market in Auckland is very expensive relative to people’s earning capacity.  This hasn’t changed for many years and seems to be the new normal.

People are seriously considering leaving Term Deposits where they are getting 1% and buying property where they are getting 2.5% after outgoings (in some instances people are opening up a share trading account for the first time in their lives).  On the surface a great outcome, but it comes with higher risks.

People are thinking of taking out mortgages aged 60+ because debt is cheap.  Yes, it is the cheapest it has been in history and may well get cheaper, but you have to have the belief that prices will continue to rise after 10 years of good gains or you simply want to put a roof over your head for retirement.

Should I be paying off my mortgage or pay interest only?

Now as you have heard before, the answer will start with it all depends!

Principally my argument is rates have never been this low so why wouldn’t you try to pay it off faster. However, some people have said they can make far more investing than the cost of the money.

So if you borrow at 2.5% you have to make 4% before tax approximately to be even. For the effort involved and the extra risk I would want to make 10% a year to make it worthwhile. Here is the question, can you make 10% a year to make it worthwhile borrowing at 2.5%, if Yes then great, but remember you have to do it for many years not just one or two.

I have seen some people get lucky and buy Tesla or Nikola shares or perhaps some Bitcoin but equally I have seen others invest and lose a substantial amount of their investment.

As they say, “you pay your money and takes your choice”. Just make sure you do plenty of due diligence. She’ll be right won’t cut it.