Money: Battle to beat the mortgage burden

Research shows that few New Zealanders bother to restructure home loans to save money. But that could all change as banks and lenders chase business in a flat housing market. PHILIP MACALISTER reports.

It's hard to believe, but it's true. Banks and lenders are telling people how to save money on their biggest financial commitment - their home loan.

In the past, the general attitude has been that "banks are bastards," out to make as much money as possible from one of their main lines of business - mortgage lending.

They would sell you a basic loan, probably on a floating rate, and then move on to making the next sale and generating a bit more profit for their shareholders.

Now New Zealanders are seeing an unusual thing. Some of the big mortgage lenders are offering to help you save costs with your mortgage.

Two instances of this apparent bank generosity are WestpacTrust, which says it can help you save up to 40 per cent on your interest costs, and AMP Banking, which is doing an advertising series with author Martin Hawes showing people how they can better manage their mortgage.

Such a move has come not a day too soon, as New Zealanders have been steadily increasing their household debt levels over the past decade, and they are collectively paying hundreds of millions of dollars each year in interest payments.

The need for better lending behaviour is made clear in a study by AMP Banking that reveals we are poor mortgage managers.

The survey of 300 people in six metropolitan centres reveals three main areas where New Zealanders let themselves down with mortgages:

They spend little time shopping for the best deal in town, despite heavy advertising campaigns from lenders.

Most borrowers go with the simplest mortgage arrangements, either a fixed or floating loan.

Hardly anyone regularly reviews their mortgage. These findings are stunning compared with how people manage the other side of their personal financial balance sheet - their investments or assets.

With investments, people tend to have a pool of money which is diversified across asset classes, and they pay regular attention to what their investments are doing.

Checking the balance is common and if one type, say an investment in a listed New Zealand company, is not performing, they will shift their money elsewhere.

But do they do that with mortgages? No.

AMP's survey says that just 4 per cent of mortgage borrowers review their loan regularly.

"The majority of respondents appear to take a hands-off approach to mortgage management, only reviewing their mortgages when triggered by large events such as significant interest rate changes, or buying or selling a property," says AMP Banking marketing manager Karen Clough.

Research also shows that when it comes to investing, people spend a lot of time shopping around for the deal that best suits them.

The survey shows people have quite different attitudes to mortgages and investments. Nearly threequarters of respondents said they would talk to two or three providers when setting up a mortgage, but actual behaviour differed.

On average, respondents consulted only 1.3 information sources when they took out their last mortgage, with more than half (57 per cent) talking to their existing bank, and fewer than two in 10 approaching another lender or a mortgage broker for advice.

A similar survey in Australia showed the average time taken to find a loan was 28 hours, spread over eight weeks at a cost of $A305 ($380).

The reality is that New Zealanders are not sophisticated mortgage users.

As Loan Plan business manager Martin Shepherd says, we are just credit machines - borrow the money as easily as possible to buy something, and pay later.

Cherie MacFadyen, a Mortgage Brokers Association executive committee member, says New Zealanders are not used to the different types of loans now available, nor are they used to the techniques which can lower the overall cost of a mortgage.

One does not have to think back too far to remember the days when there was no real choice of mortgage.

What was offered was a principal and interest loan, and the biggest decision (generally dictated by the banks) was whether it was a table mortgage or a reducing one.

Now there are floating and fixed rates, revolving lines of credits and split loans.

Ms MacFadyen says that while New Zealanders may not necessarily be shopping around for the best deal, people who use the service of a mortgage broker will be offered a greater range of mortgages and services than if they did it themselves.

Mr Shepherd says mortgage lenders, until recently, have not been proactive in advising lenders how to repay their debt early.

"They have wanted them to keep their mortgage forever," he says.

However, that all changed when businesses sprang up that focused on helping people to save money on their mortgages by rearranging their finances.

Mr Shepherd says that while the banks are now offering this type of service, lenders are still poorly educated about the options that are available to them.

"Investors don't understand how a principal and interest-style mortgage works," he says.

His view on the lack of understanding is shared by others, including AMP Banking general manager Gary Morrison.

He says people need to spend more time learning about mortgages, and lenders have to make their products easier to understand and hassle-free.

In the survey, 39 per cent of respondents agreed that they could save money by restructuring their mortgage, yet they were not doing it.

Several reasons were put forward, including the belief that a restructuring of their mortgage would cost too much money, that the process would take too much time and effort, and that they had insufficient income to restructure.

Mr Morrison says a few simple tips, such as increasing the frequency of payments from monthly to fortnightly, or slightly increasing the level of repayments can have significant positive impacts on the overall cost of a mortgage.

But, why are banks and mortgage lenders being apparently so generous and telling you how to save money?

The underlying reason appears to be that the mortgage-lending market has dried up as house sales have slowed.

After a period of significant growth in the number and volume of residential mortgages, things have flattened off and mortgage writers have now shifted their focus from competing for new business, to competing for market share among existing players.

There seem to be two tactics used to encourage people to shift.

There is the line, "Come to us and we will save you money."

And there is the approach that the Bank of New Zealand has taken with Global Plus, where it says, "Come to us and we will, effectively, give you a free holiday by giving away air points."

Perhaps the good news is that we are not alone in this area.

A survey by eChoices in Australia showed that there were plenty of other things Australians would rather be doing than looking for a mortgage.

It said that finding a home loan rated down with renovating the bathroom and visiting the dentist. Having sex and taking a holiday proved the most enjoyable.

Well, if you manage your mortgage better, you can have more of the things you enjoy.

* Philip Macalister is the editor of online money management magazine Good Returns. It provides news on managed funds, mortgages, superannuation, insurance and financial planning.