Rental property mortgages – can advisers help?

For property investor Liz Harris (pictured above left), managing her own mortgages was never questioned – she just did it.

Having started investing in property in 1984, a time when a direct-to-bank relationship was the norm, Harris has managed the mortgages across her rental property portfolio for decades.

Eugene Bartsaikin (pictured above right) director and mortgage adviser at Twine Financial Advisers, said while some property investors choose to do the work themselves, having someone to talk to was an undervalued part of what advisers do.

Referring to herself as an “accidental landlord”, Christchurch-based Harris became a property investor after buying a house with five flats and “terrible tenants” next door. 

After borrowing 100% of the purchase price, Harris wanted to make sure that she could cover the mortgage. She embarked on renovating the flats, enabling her to increase the rent, and converted an old shed with a toilet at the back of the property into an additional income stream.

“The next day I found out I was making money, and I had equity in the property, so I could do it again,” she said. “Back then, you just had to stumble through and find your own way.”

Over 40 years later, she has never used a mortgage adviser and said that despite not getting it right all of the time, she hasn’t gone far wrong.

“Because I’ve been [an investor] for so long, I’ve got good relationships with the banks and I’m able to talk to a specific manager who looks after me,” Harris said.

Harris said that her property investment portfolio mainly consisted of flats, apartment blocks and boarding houses, estimating her properties currently housed around 700 people.

Through the years, there was always something else to buy, she said.

“I was always getting the income up on my properties, getting that ability to borrow more and buy more [properties],” Harris said.

“Debt is the way that I make money but with my debt, I always made sure that I could cover my mortgage rates.”

Despite the advent of online communities and forums for property investors to share information and strategies, Bartsaikin said that many investors who had become clients did not want to share their financial details openly.

“Having someone to talk to can help reinforce decisions,” he said.

Managing fixed rate rollovers 

Now in her late 60’s, Harris is not taking on new property investment projects but maintains a structure to enable her to take on more borrowing and has a small portion of lending on fixed mortgage rates.

When weighing up how long to fix her mortgages for, Harris said that she undertook her own research, checking economic forecasts and talking to bank managers.

She conceded that the decision-making process can be “a bit of a guessing game”, and said that despite her practical experience, she didn’t foresee where mortgage rates would be in early 2025.

“Looking ahead at what the market is, sometimes you get it wrong, sometimes you get it right,” she said.

Bartsaikin said that mortgage rate renewals were one of the key areas where mortgage advisers could add value, helping borrowers, including property investors, to make wise decisions. While there is generally no difference in rates offered by banks compared to mortgage advisers, Bartsaikin said that one major difference was support at renewal time.

Contrary to popular belief, a mortgage adviser’s role was not to “pick the perfect rate”, he said.

“The adviser’s role is to empower the borrower with a strategy for dealing with the uncertainty of interest rates,” Bartsaikin said.

Part of the value-add for property investors was to look at interest rates across their property portfolio and check when they’re due to renew, he said.  While economic forecasts are useful as they give borrowers a gauge of market expectations and likely movements, Bartsaikin acknowledged that there were many moving parts, making forecasts unreliable.

One way of managing this uncertainty is through “interest rate averaging”, which uses analysis to set a direction.  Among the initial questions an adviser may ask is whether interest rates are rising or falling, and whether a property investor is risk adverse or more open to risk.

This would feed into a mortgage rate strategy using short- or long-term bias – or none at all.

Looking past the headline inflation rate (2.2% for the December 2024 quarter), Bartsaikin noted that inflation was split across what the country buys from outside and what things cost inside, noting that internal (“tradables”) inflation was “still an issue”. 

While the current mortgage rate situation was “a bit of a guessing game”, with some market commentators predicting that the official cash rate will fall to 3% in 2025,  just how aggressive the Reserve Bank will be in cutting rates over the coming meetings remains uncertain, he said.

“One way of dealing with that is considering a split between a 6-month or a 12-month rate and an 18-month rate,” Bartsaikin said.

This strategy would capture the overall trend of rates falling, but if the cash rate falls faster or sooner, the borrower has the chance to receive that benefit when it happens.

Managing interest-only loans

Harris said that while she’d never been a principal payer, she would pay off debt whenever she had additional money.

“Debt’s what makes you money…you borrow against a property and as capital gain goes up over the years, you’re making money on your borrowed debt,” she said. “But if you’re pouring money back in all the time, this goes against that.”

While interest-only loans are often viewed by property investors as a way to improve cash flow, Harris is a great believer in making sure that rental income covers mortgage debt.

She is wary of taking interest-only loans on new properties, due to constraints around adding value to improve rent. She also noted that property investors on interest-only loans needed to plan for interest rate rises, such as the period between October 2022 and July 2024, when the official cash rate rose from 3% to 5.5%.

Bartsaikin said interest-only loans appealed to investors because they assist with cash flow.  But they should also take into account that these loans are usually approved for up to five years.

If an investor’s financial situation has changed over that time, perhaps business income has reduced or the investor has plans to retire, the bank may not renew the interest-only period. This would leave the investor with the same mortgage, for which repayments have now increased.

“If the investor has made their purchase on the basis of having this interest-only loan, they may not have prepared for the inevitable repayment of that loan,” he said. “That may put them in a position where they have to sell their property sooner than expected.”

Before deciding on an interest-only option, an adviser’s role includes evaluating the investor’s situation, including borrowings on their main home and when investment funds are required, he said.

Scenario planning

Bartsaikin said that advisers were also able to add value to investors through scenario planning, providing a sounding board to talk through various options at no cost, and providing support when times are tough.

Investors need to understand they’re investing in a relationship – the more they put into it, the more they’ll get out, he said.

“The more we know about [the investor’s] risk tolerances or concerns, the more we can tailor the outcome to their situation,” Bartsaikin said.