Should you fix, refinance or wait?

What property investors need to know about borrowing right now

If you’re a long-term property investor, now is a good time to review your lending. Interest rates are rising, and for most investors who plan to hold, fixing for two to three years gives useful certainty. Refinancing could also put cash back in your pocket, with banks offering cash contributions to win new customers. And if you don’t already have a working capital facility, setting one up gives you a buffer if things get tighter.

That’s the short version of our recent webinar, Should You Fix, Refinance or Wait?, which I presented with mortgage adviser Kris Pedersen from Kris Pedersen Mortgages. Kris has been my own mortgage adviser since I bought my first property in 2010, and we’ve worked together with clients for about 20 years. In this post, I’ll explain the reasoning behind that advice: where the market and interest rates look to be heading, how banks are assessing borrowers, and what lending options are opening up.

One thing to be clear on: I'm a chartered accountant and property investor, not a financial adviser. The lending and interest rate guidance in this post comes from Kris, and it's general in nature, so please talk to a qualified mortgage broker about your own situation.

You can watch the full webinar recording here, or at the bottom of this blog.

What's happening in the New Zealand property market?

Right now it's a buyer's market, especially for development sites. In Auckland, we've seen sites that once sold for $1.5 million going for around $900,000, as fewer mum and dad investors take on development projects.

Here's what else I'm seeing on the ground:

1. Lower and mid-priced homes are easing in price, with fewer people at auctions as the November election makes some buyers nervous.
2. First home buyers are active. When we sold five new builds earlier this year, they all went within a week, mostly to first home buyers with pre-approvals.
3. Property traders are hunting for deals, looking for homes to renovate or subdivide.
4. Developments without car parks are struggling and often need a sizeable discount to sell.
5. Good listings are getting scarce, and the ones that come up attract buyers quickly.
6. Immigration is improving, which should support housing and rental demand.

At the time of the webinar, forecasts pointed to prices falling around 0.7% over the next 12 months. That's a flat market, not a crash, but it does mean sellers are more willing to negotiate. My rule hasn't changed: buy at a discount, and only buy cash flow positive. If the rent can't cover the property and values are flat, you're carrying the risk with no upside.

Where are interest rates heading in New Zealand?

The short answer: up, but slowly. After bottoming out at 2.25% last November, the Official Cash Rate (OCR) rose to 2.5% in July and 2.75% in September.

The reason is inflation. At the time of the webinar it was sitting at 4.1%, well above the Reserve Bank's 1–3% target. The Reserve Bank signalled no change in October, with increases likely from December, and it has pointed to a peak of around 3.25%.

Kris made an important point here: wholesale markets are pricing in more than that. Swap rates, which feed directly into the fixed rates banks offer, suggest the OCR could be closer to 3.8% in a year's time. Offshore events, particularly the conflict involving Iran and its effect on oil prices, are adding to that pressure.

There's a balancing factor, though. Unemployment is at its highest in over a decade, and sectors like construction, retail and hospitality are doing it tough. That may stop rates rising as far as some people expect. Our shared view is that rates are more likely to go up than down.

Should you fix your mortgage now or wait?

If you're on a floating rate or coming off a fixed term soon, now is the time to look at your options rather than waiting to see what happens.

Kris's general guidance depends on your plans for the property:

1. If you're likely to sell in the next year or so (for example, after the election), a six or 12-month term may suit.
2. If you're holding long term, a two to three-year term gives more certainty in an uncertain world.
3. If you have significant debt, consider splitting your lending across several terms to spread the risk.

At the time of the webinar, Kris was seeing two-year rates around 5.15% and three-year rates around 5.29%. One-year rates were sitting around 4.9% and forecast to rise towards 5.5% over the next 12 months. For long-term investors, locking in some certainty at today's rates looks reasonable, especially if you negotiate hard with your bank.

How do banks test whether you can afford your mortgage?

Banks don't assess you at the rate you actually pay. They use a higher "test rate" on a principal and interest basis, across all your existing and new debt. Most banks are now testing at around 7%, up from about 6.7% recently (and as high as 9.25% three years ago).

This matters even if you're not planning to borrow more. Extending an interest-only period, selling one property while keeping others, or moving a property into a trust can all trigger a full assessment.

A real example of why waiting can cost you

Kris shared a client file he'd been working on:

1. The situation: just under $2.9 million of lending across seven properties, all with one bank, with about 18 years left on the loans. The bank said they were around $3,300 a month short of its affordability criteria.
2. The fix: extending the loan term to 30 years lowered the test repayments and moved them into a surplus, even though nothing changed in their real-world payments.
3. The risk of waiting: if test rates rise by half a percent in the next six months, as is quite possible, they'd likely miss the criteria again.
4. The result: two properties were released from the bank's security, the rest were split across two new banks, and the clients received a $29,000 cash contribution.

The clients are nearing retirement and wanted more control. Now, if they sell the unencumbered property, they keep the proceeds rather than a bank deciding what happens to them.

Is it worth refinancing to get a bank cash contribution?

Often, yes. Banks are competing less on interest rates and more on cash contributions, and we've seen clients receive $30,000 to $60,000 when they move.

There's a reason for this. Many people now refix through their bank's app and simply accept the rate offered, so banks earn a higher margin across their whole mortgage book. The people who shop around are the ones getting the cash.

A few things to keep in mind:

1. Cash contributions usually come with new lending. Most banks won't pay one unless you bring them a new security.
2. Combine it with changes you're already making. If a restructure or ownership change means a full loan application anyway, moving banks at the same time can help cover the costs.
3. Check your break fees first. If you have a great rate with years left to run, the cash may not be worth it. Kris runs a break fee analysis to weigh the cash contribution against any break costs and rate differences.
4. Your mortgage can't move with you. You can't transfer a fixed rate from one bank to another. Moving banks means breaking the existing loan.

Even if you stay put, a good adviser can use what other banks are offering to negotiate a better deal or more facilities with your current bank.

What is a working capital facility and why does it matter?

If there's only one thing you take from this blog, it's this: set up a working capital facility. It's the single thing that has made the biggest difference to my own investing.

A working capital facility is an overdraft, or revolving credit you can draw on when you need it. With an overdraft or revolving credit, you only pay interest on what you use. It's your backup if something goes wrong, and you can access it without having to ask the bank each time.

In one client example I shared, the owners had just $50,000 of accessible cash against a portfolio of property, business and family home. That's a stressful position: if anything goes wrong, where does the money come from? By restructuring, we increased their working capital to $540,000, and the whole picture became much more comfortable.

When I started out, Kris set me up with a $40,000 overdraft. Back then it felt like winning Lotto. Today, having access to working capital means I can act on a good deal first and work out the funding after.

A word of caution: these facilities suit people who are disciplined with money. If you tend to spend whatever's available, be honest with yourself before setting one up – you might do yourself more harm than good.

What lending options are there for investors?

Funding is getting easier than it has been for a long time, between both banks and non-bank lenders.

Non-bank lenders

Banks look at your whole financial position, so investors with large portfolios can hit a wall on affordability. On the other hand, some non-bank lenders now assess only the property you're offering as security. Kris explained that one approach is to test whether 80% of the rent covers the loan at around 6.5%. If it does, they may lend even if you don't meet bank criteria across your whole portfolio.

Some investors are using this to top up depleted revolving credit facilities without having to sell. Kris is also helping developers on non-bank rates above about 6.75% move to lenders offering low to mid 6% rates, longer terms and much lower fees.

Bank funding is almost always cheaper, so that's where Kris starts. Non-bank lending is the next option when banks can't help.

Lower deposit requirements

Loan-to-value ratio (LVR) rules are loosening:

1. Owner-occupiers: one bank is now offering home loans with a 5% deposit, even if you already own another property. Previously you'd typically have needed 20%.
2. Investors: one bank will lend up to 90% on existing investment properties, compared with the usual limit of around 70%. Lending above 80% does come with higher rates and costs.

This could suit someone who wants to buy now while it's a buyer's market, and sell their existing property later when conditions improve. Just make sure the numbers still stack up.

Why split banking matters

Both Kris and GRA have long recommended against having all your lending with one bank. While LVR settings are relaxed, it may be a good time to borrow more against your investments with one bank and build up equity in your family home with another. LVR rules have tightened quickly before, and having equity in your home with a separate bank gives you room to move if they do.

How can you borrow for your business without risking your family home?

Banks are fairly relaxed about lending to businesses at the moment. The catch is that, if you go straight to your bank, they'll often take security over your family home and ask for personal guarantees.

That's a real risk. Business carries risk, and if something goes wrong, the family home can be exposed. If you've gone to the effort of setting up a family trust to protect your home, don't undo that protection by giving security over your home.

Our approach is to keep business lending separate from your home and residential portfolio. Ideally, the loan sits in the business, with security limited to business assets where possible. If you already have business lending secured over your family home, talk to Kris about whether that can be unwound.

What should you do next?

Don't sit on this. Plenty of people listen to a webinar or read a blog, nod along and do nothing. Here's where I'd start:

1. Get your lending reviewed. Kris offers a free review. He can look at your rates, fixed terms, cash contribution options and whether a working capital facility is possible for you.
2. Get your paperwork ready. To give you quick advice, Kris needs to know your goal, what income you can prove, and your equity and deposit position. If you're self-employed, up-to-date financials make a big difference.
3. Check your insurance. A client recently had a rental property damaged by fire. They'd bought it 10 years ago for $400,000 and were still insured for $400,000, but repairs cost $540,000. They had to find the $140,000 difference themselves. Reviewing your cover costs nothing.
4. Set yourself a plan. Where do you want to be in five years? Ten? Work backwards from there.

If you'd like to talk through asset protection, structures or tax planning, the GRA team is here to help.

1. Contact Kris Pedersen about finance
2. Contact GRA about tax, structures and property investment.