Lending during a global pandemic
The world is in an unpredictable and uneasy state amidst the uncertainty of Covid-19. If you have the privilege of being sheltered from the outbreak, your mind may be focused on other things – such as your assets, your finances, and your cashflow.
With the Official Cash Rate (OCR) fixed at 0.25% for the next twelve months – the lowest OCR in history – it’s a good time to seriously consider your mortgage costs restructuring or refinancing your existing debt. But is lending still an option during a pandemic?
Many people are worried about whether their money is safe in the bank, or if their bank will sell their home from underneath them if they lose their job.
Banks’ liquidity
Despite the chaos circling the financial world due to Covid-19, New Zealand banks are in good shape. New Zealand banks navigated the Global Financial Crisis (GFC) with grace and the Reserve Bank has ensured New Zealand banks are well positioned to lend. Here’s how banks will manage their business and ensure ongoing liquidity:
1. They will finance their operations with funding from shareholders and investors, as well as depositors.
2. The Reserve Bank will require banks to get a minimum amount of funding from stable sources called Core Funding. The minimum amount of Core Funding is currently set at 75% of a bank’s total loans. Banks will be obliged to maintain their Core Funding ratio above 75% on a daily basis, however, this funding ratio will be averaged each quarter.
3. Banks will now be required to start their seven-year transition to meeting tighter capital requirements by 1 July 2021. It’s estimated that this additional headroom will enable banks to supply up to roughly $47 billion more in lending than before, had the earlier Reserve Bank decisions been implemented as planned, which is great news!
Are banks still lending?
Not only are our clients voicing their concerns, they’re also looking to take advantage of the all-time low home loan interest rate.
Many property owners are working closely with their brokers to seek a mortgage ‘holiday’. Some banks are offering 3-6months mortgage repayment relief with a review at the end of this period. However, most people switch to interest-only mortgages once they understand that what is actually on offer is simply a mortgage deferral – not a cost-free mortgage holiday, and in the long run this could hit their pockets hard.
Borrowers are wary of taking repayment holidays because of the extra interest that will accumulate, and the fact that some banks are not extending the mortgage term but instead increasing repayment amounts after the holiday period ends. Some banks have even told their broker network they are not accepting new clients for the foreseeable future.
Banks are however, processing interest-only changes quickly, however mortgage deferral applications are taking longer than expected. This is due to the fact that before being blindsided by Covid-19, many banks lacked sufficient numbers of frontline loan processing staff. With the nationwide 4-week lockdown, and a flood of enquiries, response times have been pushed out even further. This may explain why banks no longer appear to be interested in refinancing mortgages from other banks unless the application is a no-brainer.
Banks have also started picking the low hanging high ROE fruit in favour of the more complex and potentially more risky business they may have considered over the past decade. This potentially flies in the face of supporting the recovery effort. Their eyes will be firmly on the prize of high value future returns and they will take this opportunity to cleanse themselves of their long term riskier lends.
Despite this, shrewd investors will be looking for bargains and, hoping to make easy money by locking-in all-time low interest rates whilst focussing on the long-term harvest which has previously worked in their favour. Investors feel that, while listings may slow down a fraction many properties on the market will be distressed for sale providing opportunities for property investors.
Has the government stalled the economic recovery?
Whilst aspects of the government’s response to this health crisis have been applauded, economically we question certain decisions, namely:
1. Why did beneficiaries get a pay rise due to Covid-19?
2. Why were minimum wage increases not deferred during the greatest economic downturn of the century?
We believe that the only people penalised by these short-sighted actions are hardworking Kiwis. In our opinion, this was nothing more than a play to win votes at the next election. Yet the ramifications of these irresponsible actions will be felt long after the election. Yes beneficiaries will spend, however imagine if this hand-out was delayed 12 months and the funds spent across small businesses, to keep the productive part of the economy employed, which ultimately ends up with the government earning more in tax yield and paying out less in benefits. (Just a thought)
Returning to business after Covid-19
The economic ramifications of Covid-19 and lockdown isolation will be long and hard felt. We believe the government needs to allow the productive economy workers to return to work in a controlled fashion. Obviously, the quicker we can restart the entire economy the better.
Banks will struggle with increased demand and will find it difficult to cope with the influx of hardship enquiries. Unfortunately, the banks have been consistently shedding experienced staff for more cost-effective contact centres and cheaper labour. This will now seriously impact the direct customer experience. Gone are the days when your banker could give you an answer on the spot, therefore causing a lot more stress.
Mortgage rates were low heading into this recession and now at an all-time low and may not go up noticeably for two or more years. Investors will, therefore, pull their bank deposits in favour of property yields by continuing to buy assets at lower prices.
The early bird catches the worm. The earlier you get on top of your finances the better you will weather the storm that’s coming. Fix your mortgage at low-interest rates now for the long term. And if you already have debt, restructure or refinance onto a low rate to ensure you come out the other side smiling.