News

Tough year ahead for investors

Advisers are predicting a tough year ahead for investors as new restrictions on lending loom.

The Reserve Bank of New Zealand has announced a new “60/5” rule, meaning banks will only be able to lend 5% of their book to investors above 60% LVR.

In effect, it means most investors will need a 40% deposit from May.

ASB, ANZ and BNZ have mandated new 40% deposit requirements for investors in recent weeks.

ANZ said it introduced the new rules as “escalating property prices are putting home ownership out of reach for many Kiwis”.

It said, “Current settings favour property investors particularly over first home buyers.”

In February, BNZ and ASB dropped a bombshell on advisers, halting new loan applications for investors unless they have a 40% deposit.

BNZ said its decision was due to “unprecedented demand”, adding it wanted to prioritise existing customers.

The decisions come as investors are blamed for fuelling record house price growth in New Zealand.

Investors borrowed $2.24 billion in November, up on $1.8 billion in October, close to the record $2.4 billion borrowed in May 2016, according to RBNZ data.

Investor lending at high LVR levels, above 70%, rose to $844 million in November, up from $745 million the month before. Those levels have not been seen since 2014-2016.

Advisers fear their investor clients face a challenging year ahead.

David Green of adviceHQ said: “Landlords have certainly had a tough time over the past 12-18 months with different laws and regulations coming into place. There’s definitely a feeling that things are getting harder for investors. “In terms of lending conditions for lenders, I can’t see it getting any easier,” Green added. “We will have to wait and see what the Reserve Bank does, and whether it returns to pre-Covid LVR settings, or the stricter prior settings in place years ago.

“Any decisions have ramifications on the wider economy. There’s still a lot at play here, and another Covid outbreak could change everything.”

Geoff Bawden of Q Group said advisers have been “singled out” unfairly for the sharp increase in house prices.

“While they are partly responsible, in my opinion there are other contributing factors – such as shortage of good stock; Kiwis can't travel so they are looking to spend; first home buyers have been panicking, with low interest rates.”

Bawden added: “Banks have already tightened the noose for investors. They did that in November and from what I can see it hasn't really dampened enthusiasm. I don't see Reserve Bank policy change having much impact because the outcomes have already been acted upon.”

Bawden said responsible lending principles would make things harder for investors in the year ahead.

“Responsible lending will continue to drive outcomes and exclusions around what can be included as income, scaling of income and stress testing will continue to be the norm which makes it difficult for everyone, particularly investors,” he added.

Warning on fee for service charges

More clients are playing off mortgage advisers against their bank, leading to disputes over fee-for-service charges, says FSCL chief executive Susan Taylor.

In a red-hot mortgage market, a growing number of clients are using an adviser to source a low rate, and using that rate to negotiate better terms with their bank.

After ditching the adviser and sticking with their bank, some borrowers have been shocked to learn they are subject to “fee-for-service” charges, the Financial Services Complaints Limited boss says.

“More people are sourcing a loan through an adviser, deciding not to proceed, and staying with their existing banks. However, in these situations, advisers are perfectly entitled to charge for their time,” she adds.

“From time to time we see clients acting badly, and trading off advisers with their banks. We've seen some complaints about it as clients are unaware they could be charged a fee if they didn't proceed with the loans.”

With more clients playing off advisers against banks, Taylor warns advisers to make sure their agreements are clear and charges are outlined, leaving no room for ambiguity.

“Advisers are entitled to be paid for their time provided they are clear about it,” she says. “Point it out to the client at the start, and explain. The vast majority of people understand advisers need to be paid, provided they know about it. Most people are perfectly comfortable with advisers earning a fee like any other professional, like a lawyer or accountant. Advisers don't need to be shy about letting people know fees will be payable.”

OCR predictions change amid strong data

Better-than-expected economic indicators prompted forecasters to change their predictions for the official cash rate.

Unemployment figures in February revealed joblessness fell below 5% in the three months to December.

Stats NZ data showed a drop in the seasonally adjusted unemployment rate from 5.3% to 4.9%.

The surprise figures were enough for ANZ chief economist Sharon Zollner to abandon her prediction of another OCR cut.

Zollner said: “We no longer expect the RBNZ to cut the OCR again this cycle.” She added: “We are inclined to take this at face value and conclude that conditions are unambiguously better than previously feared.”

The ANZ economist said the Reserve Bank could be more “patient” in its approach, and predicted an expansionary stance from the central bank.

“The RBNZ’s employment and inflation mandates are now looking more achievable, with the economy better placed to weather headwinds than previously feared,” she added.

BNZ economists went one step further, and predicted the next move for interest rates would be up.

The bank made a bold prediction that rates would begin to rise again in May next year.

“There is still massive uncertainty as to when and by how much but, today, we are formally building in a first rate hike in May 2022,” the BNZ team added.

Turnaround time improvement?

Advisers have begun to note a slight improvement in bank turnaround times, according to economist Tony Alexander's latest survey of the market. Alexander's monthly survey of the adviser market reveals “banks have improved their turnaround times in most instances, but not all”.

One Auckland-based respondent to the survey said: “Bank turnaround times have been good after the break; deals are now getting picked up and approved within a few days and [that] seems to be across all banks.”

Another Aucklander added: “Bank turnaround times have improved since the New Year with the exception of one bank, and this is providing better service levels to our clients.” However, not everyone was in agreement. Three respondents to the survey described turnaround times as “appalling”.

One of them said: “The turnaround times once again from all banks are diabolical. The way in which a number of lenders speak to advisers is quite appalling. [It’s] evident the banks are not broker friendly at all, though they say they are.”

Be clear on clawbacks

Mortgage advisers must clearly disclose clawback agreements with clients, industry leaders say, as disputes on the topic continue to emerge.

A recent complaint to dispute resolution service FSCL, in which a client complained about a $2,500 clawback fee, underlines the ongoing friction between advisers and clients on the topic.

A man received the $2,500 bill as he had refinanced his loan within 24 months, with the original lender clawing back its commission from the broker.

FSCL said the adviser in question was entitled to a fee, but sided with the complainant, as the broker's terms of engagement were deemed to be too vague.

While clawbacks are a vital tool to compensate advisers when clients change course, top advisers say the industry needs to be clear on the scope and size of potential fees.

Hamish Patel of Mortgages Online said, “Passing on some of the clawback to the client can be ok, as long as it is clearly disclosed to the client upfront.”

He said his business caps the cost at $2,000, and only if the company is charged a clawback.

He said: “It would be unfair to pass on the full amount of the clawbacks to most clients as, in a way, we are not paid for the time spent on that particular client, but rather the cost of running a business which is only paid on success of procurement.” ✚