Saving a rainy day fund and getting the mortgage to a manageable level should be top priorities for borrowers, a financial adviser says.
COVID-19 has created uncertainty and for many, loss of income. Despite this, current Reserve Bank figures show a massive jump in mortgage borrowing. Total mortgage lending was $9.289 billion in November, up 73 percent from $5.364 billion in June, and up 36 percent year-on-year. At the start of January, $2.393 billion of mortgage borrowing was on deferral and $12.8 billion was on interest-only payments.
Record-low interest rates make it easier to justify increasing the mortgage to buy luxury items, such as high-end cars, jet skis and boats.
And low returns from savings accounts and term deposits may tempt people to put money into riskier investments offering potentially higher returns.
But Tim Fairbrother, financial adviser at Rival Wealth, suggests borrowers make sure they have an emergency fund and get debt to a manageable level first.
"If COVID [has] shown us one thing, it‘s that we’re fragile to cash flow issues if we lose our main source of income...we all need a plan b and a rainy day fund is the first part of this," Fairbrother says.
"Once you have this in place, the next best thing you can do is pay down personal household debt such as your mortgage," he adds.
For example, borrowers coming off higher fixed interest rates could re-fix at a lower rate and keep repayments the same. Mortgages can be set up to allow extra payments without fees. By repaying the loan principal faster, borrowers save money on interest costs.
"Unlike riskier assets that can drop in value, your mortgage is a set payment with no volatility."
But what about borrowing against the mortgage to pay for house renovations - such as adding on an extra bedroom, ensuite or swimming pool?
The simple answer is, as long as it’s affordable and people don’t overcapitalise (spend more than they’re likely to get back when the house is sold).
Borrowers should bear in mind that although interest rates are currently low, they aren’t guaranteed to stay that way. Earlier in February, Infometrics senior economist Brad Olsen said while he’s not expecting interest rates to rise for a few years, given the better-than-expected economic outlook and recent drop in unemployment, there’s mounting caution on how quickly rates could rise.
"In a few years’ time, lending rates could rise and the cost of borrowing will increase...this extra cost may no longer fit into your future budget, so you need to ask yourself if you could afford this extra cost if the repayments doubled or possibly tripled," Fairbrother says.
Once a rainy day fund is saved and the mortgage is manageable, he suggests people looking to invest in the current low-interest rate environment keep the following three tips in mind.
1. Don’t chase higher returns without evaluating the risk
"People can move from the safety of bank deposits to rental properties and shares but they must be ready for elevated volatility over the next few years as the global pandemic resets financial markets."
2. Consider personal goals
The amount of money available for investment and the timing of personal goals will affect investment choices.
"[For example] someone looking to invest in riskier assets may find their main goal is to maximise the capital they have."
Getting advice first is a good idea.
3. Think 5, 10, 20 years into the future
Investors need to think long-term.
"Rather than try to jump onto the next big thing and make a quick buck, all the while risking your hard-earned capital, investments need to meet your long-term goals," Fairbrother says.
