Hi friends, how is it going during the lockdown? 

Since most people in New Zealand now are still under the Level 2 or Level 4 lockdown or experiencing the related financial impacts, this week, we would like to make a particular topic to discuss. 

We will mainly focus on some current changes in bank policies, making previews, and commenting on their tendencies.  

Under the main topic, we are going to explain the interest rate trends under the COVID-19 condition, the types of government financial support for different groups of people, and the updates of loan policies in different banks. 

If you are wondering how to deal with your loans, or need some financial advice, please feel free to contact us. We will make a professional analysis and assessment for individuals according to the latest policies and your own situations to figure out the customized solutions.

How loan goes during a lockdown?

Video Timeline 

1. The change of interest rates after the lockdown  2:50

2. The financial support for business owners 4:53

3. Support for people who struggle with repaying the home loan. 8:36

4. The importance of cash reserve 9:19

5. New lending applications 12:05

The change of interest rates after the lockdown 

Official Cash Rate (OCR) remains the same. 

Although the lockdown brings many inconveniences and income effects. There is still a piece of good news for those who have home loans. The OCR was announced to remain the same as before on the 18th of August. That means the speed and magnitude of the increase of the interest rates will be much less than what most economists predicted before. 

The prediction of the trends of interest rates changes

You might hear that most of the banks have increased their interest rates months ago because they had an assumption that the OCR would definitely increase. 

However, because of the lockdown, the OCR keeps unchanged to help the economy recover. The unchanged OCR will slow down the interest rate increase, and I think the rates may even go back a little bit in the short-term future. But in the long-term, I believe the interest rates will still go up, because of the border close and the high inflation. The lockdown can only slow down and defer its increase. 

If you have some questions like ‘How much can I borrow?’, ‘How I should fix your loan?’, ‘Should I break it?’, ‘Should I fix it?’, ‘How long do I want to fix for?’, I’m happy to review them and provide some customized advice for you.

The financial support for business owners 

The businesses located in New Zealand are significantly affected by the COVID lockdown because most of the businesses cannot operate under level 4. The government provided some assistance to help people overcome the cash flow challenges. 

Here I summarized some of the financial support and provided a simple description of them. But please check and refer to the official website for all details: https://www.business.govt.nz/covid-19/financial-support-for-businesses/ 

Wage Subsidy 

There are two rounds of wage subsidies applications, the first round has already closed, and the due of the second round is Sep 16th, 2021. If your business is affected by the COVID-19, you can apply a $600/week subsidy for your full-time employees, and a $359/week subsidy for your part-time employees. 

Resurgence Support Payments 

This support is for the business whose revenue dropped by 30%. The payment is $1500 plus $400 per additional employee, you can apply for a maximum of $21,500 in total. These payments can help the business reduce kinds of fixed costs. 

Small business cash flow scheme.

Again, if you are suffering at least a 30% reduction in revenue, there is a five-year loan can be applied to help you overcome the cash flow challenge. The loan is interest-free if you finish repaying within two years. If you do not repay the loan in the first two years, then there is a 3% interest rate in the last three years. 

Leave Support Scheme

If you or your staff have been told by a health official to self-isolate and cannot work from home, you can apply for the COVID-19 Leave Support Scheme. This support will be paid as a lump sum covering two weeks (you can reapply if required) of $600 per week for full-time workers and $359 per week for part-time workers.

Short-Term Absence Payment 

COVID-19 Short-Term Absence Payment is available at all Alert Levels to employers to pay workers who follow public health guidance and are staying home while waiting for a COVID-19 test result. 

It’s also available to eligible self-employed workers. To be eligible, workers need to be unable to work from home and need to miss work while waiting for the test results.

There’s a one-off payment of $359 payment for each eligible worker. Employers or the self-employed can apply for any worker once in any 30 days.

Business debt hibernation

If your business struggles to pay a debt, the Business debt hibernation can help you protect your business. Under this support, the creditors cannot take legal action against you. So, this is quite good to help you manage your cash flow.

Tax support 

The provisional tax and terminal tax are normally large payments. If you struggle to pay the tax on time, please best talk to your accountant or IRD as soon as possible, do not wait till the last minute, because the penalty can be huge. Now IRD normally quite accommodates these types of situations. If you talk to them early, they will try to help you as much as they can.

Support for people who struggle with repaying the home loan.

Lots of people are suffering from income reduction due to the lockdown. Now, most of the bank has a mortgage holiday like option providing for you. This means you do not need to pay anything for this period of time, but at the end of the day, you have to pay all the payments, including the interests. There is no discount, but it can at least help you manage your cash flow during the tough period. If you want to learn more about this option, you can directly contact the bank, or you can also let us know and we will help you to apply it.  

The importance of cash reserve

During the GFC time between 2008 and 2009, a lot of people were forced to sell their properties because of the cash flow crisis. That means they cannot keep up with the mortgage payments. At that time, the rental income could not cope with the pace of interest rates increases, many people had to default, and their property has to be sold through mortgages sale. If they had some cash reserve to deal with the emergencies, they could be more likely to keep their property till now, and its value probably more than doubles by now. 

This is an important lesson to learn. To hold plenty of cash is super important to make sure that you still pay the bank on time. If not, please tell your bank as soon as possible. 

What can you do to reserve some cash on hand? 

For example, you have some savings, and you want to make a lump sum payment to your home loan. Instead of just making a lump sum payment, what you can do is split your loan into two chunks. You can have a small loan that matches your savings and convert that loan type from a standard home loan fixed-term loan to a revolving or offset loan so that your savings will offset the loan amount (more can be seen in our previous video: Three tips to help you improve tax efficiency under the new interest deduction rules). Then you don't really have to pay interest on that portion. Moreover, when you have needs, you can use some cash for emergencies. It's important that you always have some cash reserve and the remaining portion, you can roll over for another fixed term. So that is a smart way to help you preserve as much cash as possible.

New lending applications

For people whose income has been affected significantly: we recommend you wait till your income goes back to normal before you borrow money. Because if you apply while you are on reduced pay, then banks will use reduced pay and as a result, your borrowing capacity will be reduced. If you want to maximize your borrowing capacity the best way is to wait.

The bank policies: the only change of the policies is that the ASB has reduced the amount of rental income they recognize, instead of taking 75% of the gross rent as your net income, they now reduced to 60%., Similarly, ANZ reduced to 65% a couple of months ago. That means the servicing is going to be reduced. We have a detailed explanation of the impact in one of our previous videos (Should you be concerned about DTI (debt-to-income ratio)?).

If you're looking to borrow and purchase properties in the near future and your current incomes are not affected, then probably it's a good idea to apply for a loan as early as you can. Because in the future, the bank policies can become harsher, including but not limited to increase the test rates, discount on rental income, DTI, etc. Therefore, your borrowing capacity would reduce accordingly. At the same time, thanks to CCCFA, banks will need to know more detailed information about your living expenses and borrowing purpose, and repayment plan when you apply for a loan. So, if you can and if you want, do it early.

Turnaround time

In terms of turnaround time, now is actually two extremes. 

Some banks become much quicker

Some banks like Westpac, before the lockdown, need seven to eight working days to turn around. And now because many branch staff cannot open their branch, the banks actually allocate their resources to help with the loan approvals during the period. 

Some banks become even slower 

On the other hand, some banks need a longer time to deal with the cases because their staff now is working from home and their systems still do not adapt to that.

The turnaround speed now is two extremes, so, if you have a plan to borrow more, probably start early, so that you do not miss any opportunities.

Well, we shared a lot of information here, and we hope some of them can actually help you. If you want to discuss further or have any questions, please feel free to contact us. We are more than happy to help. 

Read more:

Three tips to help you improve tax efficiency under the new interest deduction rules

Are higher interest rates coming?

Should you be concerned about DTI (debt-to-income ratio)?

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.