Home Truths: Look back, move forward

Darren Pratley, Chairman NZMBA. Photo / Supplied

As we move further into 2011, it is important to review last year from a lending and credit point of view. Within the real-estate market, the availability of funding is so critical and can lead to recovery or continued stagnation.

Recent data has indicated that household debt has begun to reduce thanks to many consumers choosing to pay off existing debt rather than spend it on luxury items. This will improve households' balance sheets and also create confidence in a more positive economic climate.

Over the past year we have seen a continued reduction in the number of lenders in the market, and mainstream lenders reducing the number of products on offer. Consumers are left with limited options, with the main retail banks being the most likely choice - and these banks have been focused on credit conservatism and quality more than volume.

However, we have begun to see the thawing of lending criteria within the main retail lenders. At the start of last year the need for a 20 per cent deposit was almost mandatory and a thorough investigation of the type of property that was going to be used as security for the loan was undertaken. We are now seeing lenders being more open to lending as high as 95 per cent again, but with strict criteria. Lenders are requiring registered valuations to ensure prices are investigated and confirmed when borrowing more than 70 per cent of a property's value. Lenders are also making sure a potential borrower can meet repayments. This means checking pay slips and bank records to ensure level of income is proven and self-employed borrowers providing two years' financial accounts to show they have a level of income that can be relied upon.

In 2011 the final components of a new regulatory regime for financial advisers is about to be implemented which will provide cornerstones of responsibility and accountability. This means advisers will provide advice with more accountability and clarity to the consumer.

As part of the new environment consumers will have an independent dispute resolutions service specifically for the financial services industry. This will aid consumers who have a legitimate dispute around the advice they have been given from an adviser. Consumers can do their bit by having an understanding of the household budget. This helps a family know were money is going and can provide some ideas about where it can be saved or diverted into other more important areas.

Next, looking at your debt structure is important. As your mortgage payment is usually the largest outgoing in the family budget, it is important to ensure it is working and continues to be competitive compared to similar products.

Your loan term should be monitored to ensure the repayments are as much as you can afford rather than the absolute minimum. By adjusting this loan term you can constantly ensure you are only paying interest on money you need to borrow and are trying to pay the loan amount back as quickly as you can.

The length of term for a fixed interest rate is another area that should be considered as this also can limit a major risk - interest rate increases. When you take a fixed interest rate you are committing to borrowing the money for a set time but just be aware if you want to repay the loan in full prior to the end of the fixed period there could be break fees to pay.

Many New Zealanders have remained on a floating interest rate after the expiry of their fixed term providing some repayment relief after being locked in to higher rates from preceding years.

There are some risks in this and borrowers need to keep an eye on what rates are doing. Getting caught if rates increase can mean further repayment pain or lost opportunity if rates jump due to overseas events or unexpected recoveries. So remember don't stay on floating without monitoring interest rates.

Make sure your mortgage broker is a member of the New Zealand Mortgage Brokers Association as they provide professional advice and work to a code of ethics.

It is important to have a plan around your budget and debt management - and to have an adviser or broker that you can talk to and keep in touch with.

- Darren Pratley, Chairman NZMBA
www.nzmba.co.nz