Helping to scale the coming interest rate rate cliff
John Bolton, has come up with ways to make the coming loans crunch marginally less painful for borrowers, even if it will still hurt a lot.
Thursday, February 9th 2023, 8:59AM 
2 Comments
by Eric Frykberg
His recommendations are to proceed with extreme caution in determining the duration of a new loan that replaces an expiring one.
He also calls for people to take full advantage of cash inducements that banks sometimes offer to people to send business their way.
Bolton, who founded Squirrel, says a large numbers of people with 3% mortgages will be replacing then with ones at around 6.5% sometime this year.
“If you’ve got a million-dollar mortgage, the transition is going to set you back about an extra $2,000 per month – or $24,000 a year,” Bolton says.
“Not a lot of us have that sort of spare change floating around, and so then the question becomes, well, how do you fill the gap?”
Bolton says borrowers can't avoid these increases but they can mitigate them. Like the others, he sees the current upward propulsion of interest rates as a medium term problem. Already he sees signs of easing pressure on long term rates due to both politics and economics. So, after going up for a while, interest rates will come back down.
“Once we’re through the current period of higher rates, it’s pretty reasonable to expect that mortgage rates will come back and stabilise somewhere around 4.5% to 5.00%.
“That is the 'neutral' rate, based on the margin banks charge over the official cash rate. I call it the 'Goldilocks' rate, not too hot and not too cold.”
Bolton's argument is that people should not get locked out of enjoying that relatively happy experience by fixing their loan for too long now.
He recommends either one year or two fixed rates, depending on how confident they are feeling.
“Anything over and above the 5.00% mark in terms of interest rates is an added cost that you should only need to grapple with relatively short term,” Bolton says.
He also urges people to take full advantage of cash inducements offered by banks. Borrowers will have to switch banks to achieve this but it could be well worth their while.
“You’ll have to submit a new loan application, with the full plethora of paperwork, and pass servicing calculations (which is a bit tougher at the moment). It’s a bit of a pain in the butt, but it’s all relatively straightforward, and arguably well worth it.”
Bolton adds there could in some cases be a risk of paying a clawback and discussion with an adviser is highly recommended to avoid this.
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Comments from our readers
The banks introduced the policy of offering large size cash contributions to clients for new home loans some time ago. Whilst mortgage advisers shouldn't be advising their clients to switch banks just for another helping of cash, we do have an obligation to make people aware of what offers are currently available. 1% cash on the loan amount been borrowed seems to be the new norm which can be a hell of an incentive if your client happens to dislike their current lender. The banks themselves created this environment whereby people can now jump between lenders every few years to get more cash and I don't think too many mortgage advisers have much sympathy for them. The big thing with these large cash amounts being offered is the cash clawback periods that come attached to them. John mentions this above. Clients often need to be reminded about these when they are considering a change of lender. BNZ & Kiwibank stipulate 4 years currently whilst ANZ, ASB and Westpac require their clients to remain with them for at least 3 years.
Across the ditch mortgage advisers in Australia have it tough. Advisers there currently have to contend with banks only clawing back cash offered to customers (cashbacks) for very short periods of time i.e. up to 6 months. Customers are now able to cycle through lenders, claim their cashback and leave advisers high and dry. One adviser interviewed last year noted he had several clients that had refinanced multiple times within a year, claiming a cashback each time, while leaving a string of advisers out of pocket via clawbacks.
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