As mortgage broker in New Zealand, we’ve helped thousands of clients secure their home loans. When clients make enquiries, we often ask them more questions surrounding their actual needs and plans, not just run errands, so that we can work on getting them the best possible outcome for their home loans.

For example, when a client asks us for advice on refinancing his home loan to another bank, the first thing we need to know is why my client is thinking about refinancing. Is she thinking about getting cash back? Taking advantage of lower interest rates or have other reasons? Because when clients wants to refinance, it doesn’t mean that refinancing is the best option for them.

By asking questions to understand the deep reasons behind client’s intention, we can find out the best home loan strategy helping them achieve long term financial goals. In this week’s blog, we use a case study to discuss why we don’t recommend the clients to refinance their home loan, which beyond their expectation.

Why we didn’t recommend the client to refinance (case study)? 

Video Timeline

1. Why we didn’t recommend the client to refinance? 01:27

2. How did we help the clients to achieve their financial goals? 04:59

Several days ago, a client called us for seeking advice on refinancing his home loan. Here’s his situation:

The client is an architect. She and her partner have stable income. Their combined income is about $130k.

Currently, the client and his partner only have $540k of loan against their family home. They were thinking about refinancing their home loan to a new bank. Their loan fixed term was about to come off and they thought about refinancing for getting cash back and lower mortgage rates, which were the common reasons for people to refinance their home loans.

As professional mortgage broker in New Zealand, we didn’t just do what our clients ask us to do. We moved one step further to understand more about their plans. So, we asked:

“What’s your plan for the next few years? Do you plan to pay off your mortgage or buy a rental property?”

The client replied that they absolutely want to buy a rental property, rather than paying off their mortgage fast. Then, as an architect, she could use his job skill to invest better in the property market. But it seemed not likely to achieve.

Why we didn’t recommend the client to refinance?

Some clients ask us: “How much cash deposit do I need to buy an investment property? How to buy an investment property with no deposit? If I don’t have deposit, can I borrow money against my house to buy another property?”

In this case, the client didn’t have cash deposit to buy a rental property. So, can they use equity of their family home to buy a second property?

As their family home can secure up to 80% of the value, based on their property value ($700k), they could potentially borrow up to $560k ($700k x 80%). The clients currently have $540k of loan, so the equity calculated on their family home is just $20k. When it comes to how much deposit required for buying an investment property in New Zealand, you must have 30% of deposit. Based on that, they can only buy a property up to the value of $67k, which seemed to be impossible for them to use their equity to buy another house.

Regardless how much loan they could afford with their income, they didn’t have the deposit that the bank requires. That's why they thought it could be impossible for them to buy an investment property in the next few years. Since it seemed unlikely to buy a rental property, so they thought about refinancing their home loans, at least they could get some cash back.

How did we help the clients to achieve their financial goals?

However, we challenged the client.

The property value was $700K in the bank system. They told us several years ago, they spent about $70-80K on renovation. They predicted it could worth $740K (if the property valuer do the valuation again) as they did a renovation.

Based on how much they spent on the property renovation ($80K), and how much increase on the property value ($40k), the capital gain is not as desired as they expect. Not to mention if they don’t renovate their house.

What if they sell their current property, and buy another one that has a reasonable size of the land, so that they could use their job skills to build the equity faster?

Say their property can be sold at the price of $720k, take out 4% of real estate’s commission from the sales price and then repay the remaining loan balance of $540K. So they can have $150k cash from the sales proceeds.

If this is the case, they buy a house (owner-occupied) with only 10% deposit, rather than providing a 20% deposit to buy their new family home, they can potentially buy a property up to $1.5 million as long as they meet the criteria of borrowing the remaining 90%. But how much mortgage they could afford depends on their income. After calculating their borrowing power, we found out they could afford $900k of mortgage. Then, $1.05 million could be their budget on buying a property.

When it comes to buying a property with potential on property development, we’ve seen some clients done subdivision by buying the property within the budget from $800k to $900k in Auckland. If the client buys this kind of property, then she can add value to it and build the equity very fast, rather than saving 10 years for 30% deposit.

After seeking advice from us, the clients felt mind-blowing as they were only thinking about refinancing their home loan for the cash back in the first place. As they still have two months for their fixed loan term to be rolled over, they can discuss what they want to do. We suggest they potentially go down the track of selling the property when New Zealand property market is busy now and then buy a property with future equity in this winter when coming to the off-peak season. By doing this, not only can they buy a better family home, but also, they ensure the new property have the potential on building equity, which would be potentially better than just taking the loan to the bank and get $4,000 cash back.

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.

Prosperity Finance – here to help

We’ve been looking for ways to add value to everything we do for our clients. We understand your plan, sometimes you might think it’s impossible. We are professional mortgage brokers and are here to help you achieve every desire. Call 09 930 8999 for a no-obligation chat with our adviser.

Other blogs that you might like:

Why should you consider refinancing your mortgage?

Should I still refinance my mortgage even if my current rates are good?

Incorrectly converting home to investment property could cost you extra $7k a year