Asset rich, but cash flow poor?

During the recent property boom in New Zealand equity increased substantially in a number of Kiwi’s homes and investment properties . Unfortunately we have also seen an increase in the use of credit cards, hire purchase and personal loans which in some cases attract interest rates as high as 27 % pa!

Traditionally 80% of loans written in New Zealand are fixed for a period ranging from 1 – 5 years the most common being 2 years. During the property boom many Kiwi’s obtained goods on interest free hire purchase for 2 years and took the “supposed” advantage of no repayments during this period thinking that the interest rates on their mortgage would stay the same.

Guess what they haven’t!

The average 2 year fixed loan 2 years ago was around 6.5% they are now around 9.5% that’s a 3% rise which can result in a large increase in monthly repayments.

For example John & Sue have a home loan for $300,000 which they fixed 2 years ago at 6.5% over a 30 year period. Their principal and interest mortgage repayments during this period have been approximately $1,896 per month.

Their fixed rate loan is about to mature at the end of the month with the new rate being 9.5% which means their approximate monthly repayments will now be $2,522.

That’s an increase of $626 per month or $7,512 per year!
At the same time they took out the mortgage they decided to buy a boat for $30,000 and were offered a 5 year loan, interest free for the first 2 years and no repayments required during this period. At the end of the interest free period the rate for the boat loan increased to 19%. They didn’t make any repayments during the interest free period and now effectively have to repay the boat loan over 3 years!

The boat loan repayments are now $1,099 per month and John and Sue feel there is no way they can keep it with the inevitable interest rate increase on their home. The total monthly repayments would be $3,621.

One of their dilemmas is that if they tried to sell the boat they would probably receive less than they owe.

Problem is that John and Sue simply don’t have any spare cash but they do have the equity in their home.

One solution they could consider would be to consolidate the home and boat loan together. The combined monthly repayments would be $2,774 as opposed to $3,621.

By consolidating they are saving an additional $847 per month in cashflow and are still able to retain their lifestyle asset.

Should they decide to sell the boat, another solution for John & Sue would be to refinance the existing debt and the shortfall left owing from the sale i.e. $300,000 home loan + $10,000 shortfall = $310,000 total loan.

Refinancing can bring many benefits such as:

•	Access to cheaper interest rates
•	More effective tax structures
•	Equity release for debt consolidation or to assist with the purchase of an investment property or business

In most cases refinances are available to every body as long as you have kept up with repayments on your mortgage (and even when you haven’t see Mop up finance & non conforming) and your property is valued for more than what you owe.

We are professional NZMBA accredited mortgage brokers. It is our duty to understand the market and educate you on available options that best suit your requirements. During our fact finding process we are able to establish if it is in the best interest of our client to refinance or alternatively to restructure with their existing lender. Sometimes fees and associated costs of refinancing outweigh the benefits.

There are a number of mortgage brokers in the market that do not use NZMBA’s code of ethics and will still tell you to proceed to line their own pockets… we simply Do Not work on this basis in fact we work in reverse we know if we line your pockets you will generally come back and refer others to us!

If you would like more information on debt consolidating or refinancing or you are simply interested in a review of your current situation please complete the inquiry form and one of our specialist finance consultants will contact you TODAY!

Alternatively call us on Phone/Fax 09 437 1092 to arrange an appointment to discuss your scenario with us in person.