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Budgeting Archives - Mortgage Advisers - Mortgage Lab

Kiwis like Credit Cards… a lot.  If you’ve got 10 minutes, you could get one online right now (don’t).  And the price for easily-acquired, unsecured debt is usually ~20% p.a.

I know what you’re thinking.  Not me, I’ve got an interest free Credit Card.  Well that interest free period expires soon and a lot of people forget to move the card on.  The simple fact is Credit Cards cost a lot.

Credit Card minimum payments

Typically, Credit Card companies require a minimum payment based on the balance.  Most are around 3% per month meaning that if you owe $5,000, you need to pay $150 the following month.

As a side note, if you don’t pay your minimum payment, it is noted on your credit report for all the banks to see.  Make sure you make these minimum payments no matter what.

Balance vs Limit

Notice that the minimum payment is based on the balance – how much you actually owe – not your maximum limit.  So if you owe $1,000 and have a limit of $5,000, your minimum required payment is approximately $30 (3% of the $1,000).

But when you apply for a mortgage, the bank assumes a minimum payment of 3% of the limit.  Why?  Because the bank has to assume the worst-case scenario.  They have to assume you are going to max-out the Credit Card and you have to be able to afford the Credit Card minimum payment and your mortgage too.

How much does a Credit Card reduce your ability to buy?

Assume you have a limit of $10,000.  As we now know, the banks calculate a minimum monthly payment of $300 regardless of your actual balance.  But how much mortgage does $300 buy you?

Well, banks calculate the mortgage payments at ~7.5%.  We know they’re currently lower than that but the bank wants to know you can afford them when they go up.

A $50,000 mortgage at 7.5% (principal and interest) is around $4,195 per year or $350 per month which is pretty close to that $300 mark.

It turns out that a $43,000 mortgage costs (according to the bank calculator) almost exactly $300 per month which is the equivalent of a $10,000 Credit Card limit.

How can this help you?

Despite Kiwis loving Credit Cards, we often don’t have them maxed out either.  As Mortgage Advisers, we often see balances of $4,000 with unused card limits of $20,000.  If the client is a responsible spender, this doesn’t affect him or her in their daily life.  But, if that client is struggling to borrow enough, reducing that limit from $20,000 to $5,000 could let them borrow an additional ~$65,000 (as long as their deposit allowed for it).

it doesn’t matter if you are buying your first home or your 10th investment property, if you face an Income Hurdle, a very quick fix is to reduce your unused Credit Card limit and make yourself that much more attractive for the banks to lend to.

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new? What a waste of time!

We are holding a Questions and Answers session with our panel of experts. There will be around 20 people in the room so everyone will get a chance to ask their questions.

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night. This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like. You should leave the session comfortable to move forward with the house-buying process.

Doors open at 6pm. We will get started at 6:15pm. Don’t worry! We have plenty of parking available.

Address:

Century 21
12 Silverdale Street
Silverdale, Auckland

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FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.

 

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new?  What a waste of time!

We are holding a Questions and Answers session with our panel of experts.  There will be around 20 people in the room so everyone will get a chance to ask their questions.

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night.  This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like.  You should leave the session comfortable to move forward with the house buying process.

Address:

Harcourts
Level 2
3/2 Te Pumanawa Square, Northwest Shopping Centre
Massey, Auckland

Powered by Eventbrite

FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.

 

When you’re looking for an investment property, you are often either looking for capital growth or yield (ideally a positive cash return).  There’s a quick and easy trick that we, at The Mortgage Lab, use to calculate yield on any property we’re looking at.

Calculating Yield

Last month we looked at The Rule of 72 to calculate how long it would take to double the investment.  This month, we look at how to calculate the yield on a property.  You’re going to need the following bits of information:

As an example, a $600,000 property might receive $500 per week rent.

$500 * 52 weeks is $26,000
$26,000 / $600,000 is 0.043 (or 4.3% return).

So this property has a 4.3% (gross) return based on rental income to value alone.

Information from the yield

A 4.3% return would cover some interest rate payments (currently) but won’t cover additional expenses like insurance and rates.  Each individual property requires a different amount of income to get positive cash results.  What we’re looking for is a quick calculation to see how one property compares to another.

A quick calculation of yeild

Let’s say that 5% yield is a decent baseline for yield on a property.  If we’re looking for yield, anything below that is probably not worth investigating any further.  What is a quick calculation to get 5% return?

Well, very approximately:

if weekly rental is 1/1000th of the value of a property, the yield is around 5%

In the example above, the house was worth $600,000.  If the rent had been $600 per week, then:

$600 * 52 weeks is $31,200
$32,000 / $600,000 is 0.052 (or 5.2% return)

The 2 second calculation of yield

So for any property you are looking to purchase, knock the last 3 numbers off and you have the rent required to get to around 5%.  A $750,000 property needs a $750 per week rent.  A $400,000 property needs a $400 per week rent.

At least once a month, we try to bring you an unusual outside-the-box method to save money.  Recently we’ve introduced you to Pocketsmith.com and shown you how cleaning your heat pump can save you money on your heating.  We’ve even shown you a nifty app that hunts down the cheapest petrol which is getting more and more popular by the day.

This month we’re looking at a brilliant little clothes drying machine called the Spindel.

What is the Spindel?

Remember when you were a kid and you would part fill a bucket with water and swing it around.  The magic of centrifugal force keeps the water firmly in the bucket and not on you.

And this is what the Spindel does (amazingly well). It spins your wet clothes at 2,800 revolutions per minute, twice the speed of your washing machine. This draws out around 80% of the remaining water meaning less time in the dryer or on the clothes rack.

And less time in the dryer means cheaper electricity bills.  Because a spinning drum with holes in it is much cheaper to power than a giant heater.  1/100th cheaper according to the website.

The Spindel costs around $300 and is not available from those big box retailers (as far as I can see).  But if you order one on the website (we are not getting a commission from this, I promise), it will be delivered to your door promptly.  Installation involves taking it out of the box, removing a few plastic locks and plugging it in.

I’ve had mine running in the laundry for a few months now and have found it amazing.  We use a rack to dry our clothes and even in the darkest part of winter, the clothes dried quickly.  The amount of water that is removed is incredible.  Easily a cup or two of water is removed in the 3 minute cycle.

So what are the cons?  There are only 2 that I have found and they are very minor.  Occasionally the drum can be weighted unevenly and as you crank the turbine up to full velocity, the drum can begin to knock against the side.  It’s not a noise you’re likely to ignore but is easily fixed by stopping the machine and moving the clothes about.  The Spindel operating manual suggests folding your clothes before putting them in the machine but, honestly, who has time for that?  It’s easy enough to shuffle the clothes about to correct the weight distribution.

The second (and even more minor) complaint is that the machine doesn’t have a timer.  I know.  It’s a first-world problem when my clothes dryer doesn’t have a timer and I have to wait for 3 minutes.  I did say it was a minor complaint!

The Spindel Summary

In case you haven’t guessed, I very much like the Spindel.  There is no noticeable wear and (more importantly) tear on the clothing.  My power bill is reduced each month and clothes are out on the rack for a lot less time.

Hi Heat pumps are great.  They are efficient and quick to work.  In fact, Energywise says that a heat pump is the most energy efficient way of using electricity to heat your home.

However a lot of people are wasting money by either incorrect installation or poor maintenance.

Give your heat pump a winter once-over

Dirty heat pump filters block the air from going through and make the process less efficient

Ok, you’ve already got a heat pump installed.  When was the last time you looked at the filters?

The filters get rid of the majority of dust and pollen from the outside (most NZ heat pumps are single-split heat pumps; getting air from the outside).  This is obviously important but means that the filters can easily become clogged.  When this happens, the motors have to work harder to push the air through (or it simply doesn’t go through as much).

For most heat pumps, you should be able to easily access the filters.  If in doubt, google the exact make and model of your heat pump and add the term “pdf manual”.  This should find the manual which will walk you through the process of removing the filters.

heat pump

It shouldn’t take more than a couple of minutes to clean the filters. You can now see the carpet behind the filters meaning the air will flow through nicely.

From there, a quick vacuum is enough to get the majority of the dirt from the filters.  You’ll see the change immediately.  Replace the filters back and restart your heat pump.  You should notice a 2-3 degree increase in heat from when the filters were clogged.

Heat pump settings

Now that your filters are clean, it’s time to get the correct setting.  It’s generally agreed that a setting between 18 – 20 degrees is the best.  Any higher and your heater will be using too much energy to get the air that warm (particularly if it is very cold outside).

Focus the heat

Because the heat from a heat pump is so efficient and quick, there’s not much need to heat rooms that you aren’t in.  If you decide to move rooms, just open the door and the heat should flow through.  Heating a 30 or 40sqm room is much more efficient than heating a whole house!

Purchasing a heat pump

An under-powered heat pump will not heat the entire house which will just lead to disappointment.  We’re aware of a few companies offering special deals on heat pumps but they tend to be the lower powered units.  Seek out advice on the correct power requirements for your particular house.  As with all things, a little extra money can mean a significantly better experience.

Installation of heat pump

The best time to save yourself some money with a heat pump is at the installation.  Correct placement of a heat pump is key to getting the air distributed and circulating throughout your house.  A reasonable price for installation is around the $1,000 mark (can be $300 either way depending on difficulty) but is well worth the price you are paying.  The money you save for good installation over the lifetime of the appliance will more than cover the extra installation costs.

Summary

We realise that the outlay costs of a heat pump are high but the ongoing electricity savings are good for your wallet (and the environment).  Get the correct model for your house, get it positioned correctly and check the filters every 2-3 months in winter (less often in summer).

Welcome to our First Home Buyers Questions and Answers session.

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new? What a waste of time! Our Q&A session means you get answers to all the questions you have.

Our Panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night. This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like. You should leave the session comfortable to move forward with the house buying process.

Doors open at 6pm and we will get questions started at 6:15pm. Parking is available in all Financial Design carparks outside. Come along early to grab some nibbles.

Powered by Eventbrite

Have you ever been to a seminar hoping for lots of useful information and walked away not knowing anything new?  What a waste of time!

We are holding a Questions and Answers session with our panel of experts.  There will be around 20 people in the room so everyone will get a chance to ask their questions.

$70 worth of items with your ticket

Early-bird tickets are available in August for $29.95.  For less than $30 you’ll receive:

Our expert panel includes:

There will be no sales talk; nothing to buy; nothing to sign up to on the night.  This is an information night so you can get all your questions answered.

Some topics we’ll most likely cover:

Feel free to come with as many questions as you like.  You should leave the session comfortable to move forward with the house buying process.

Address:

SubUrban
Level 1, 2 Johnsonville Road
Johnsonville, Wellington

Doors open at 6pm and we will get questions started at 6:15pm.  Plenty of parking available.  Come along early to grab some nibbles.

*Note: to receive your free E-Valuer report and book, you must attend the seminar.

Powered by Eventbrite

 

FAQs

Are there ID or minimum age requirements to enter the event?
No (although you have to be over 18 to buy a house).

What are my transport/parking options for getting to and from the event?
Parking is available all around the venue.

What can I bring into the event?
Bring a pen and paper and all the questions you can imagine.

 

In recent years, the Reserve Bank of New Zealand has implemented a host of rules on the banks, particularly around mortgages.  These rules have several purposes.

Some of them, like the LVR restrictions, are to stop the bubble mania of 2008 from happening again.  The days of lending 100% (or more) on a property are gone and not returning any time soon.

Some of the new rules, like the Responsible Lending Code, should just always have been there.  They require a lender to be able to hand-on-heart say that they were acting responsibly in granting a loan to the client.  Banks are calculating a mortgage at 7.5% to allow for future interest rate rises.  They also assume a 25% vacancy on rental properties which allows for some vacancies and other costs like repairs and maintenance.

These changes most often come up when a mortgage application is in, what I like to call, the “grey zone”.  The clients is just on the edge of what the bank are comfortable with.  Some examples of these grey zone applications are:

At first glance, none of these criteria are dealbreakers but the banks can only take on a certain number of these loans.  They also don’t want to be known for taking on grey zone loans.  If that happens, they end up holding a majority of those loans in the country which is obviously not preferred.

How do the banks decide who to give “grey zone” lending to?

Ask any Mortgage Adviser at the moment how to get a difficult application through the banks, they will answer the same way.  A bank is more willing to lend to an existing customer than bring on a new customer.  They have a lot more information on an existing customer and they are much more able to make informed decisions.

I have accounts with lots of banks.  What constitutes an existing bank customer?

Banks count themselves as “your main bank” if your salary goes into one of their accounts.  I know most of you have just seen a workaround but unfortunately this needs to have been happening for at least 3 months (sometimes 6 months).  Don’t think you can change your salary payment tonight and be an existing client tomorrow.

Couples should use separate banks

It’s therefore a good strategy to have couples, who are looking to buy in the future, put their salary into different banks.  You can still have a joint account but my suggestion is that you put your salaries into completely different banks and then transfer the money into the one account.  Maybe put your personal spending through the different banks to really show that you are an existing customer.

With this strategy, you’ve now got 2 banks who think of you as an existing customer and are likely to be a little more lenient on you if you have to push the limits of their lending policy.  A Mortgage Adviser will still be able to tell you which bank is better to approach first.  Either way, with this strategy, you’ve doubled your odds of a successful outcome.

 

Repeat after me.
“The interest rate I pay on my mortgage is 8%…”
“The interest rate I pay on my mortgage is 8%…”

No it’s not

You’re right, it probably isn’t.  If you’ve refixed your mortgage at any time in the past 5 years, your mortgage is likely under 6%.  But here’s the thing.  You should be aiming to pay your mortgage as though it was 8% because at some point your mortgage will be there again.

Let’s look at an example of a couple with a $400,000 mortgage that is fixed for a year at 4.2%. Payments are around $470 per week and that’s comfortable for them.  But we don’t know what the future holds and so we need to plan for interest rates to go up.  So if we pretend the mortgage is at 8% we can set the payments at $691 per week.  This has a couple of benefits:

The key is to get used to higher payments.  At some point in the future, interest rates will rise and you will be well positioned to cope with it.

What if you can’t pay 8%

I know increasing your payments on a mortgage seems unachievable but the good news is, you don’t have to do it today.  You just have to aim to have them there in the future.  Here are a few steps that may help you transition to the 8% mortgage.

Step 1

Using our mortgage calculator, calculate what your mortgage payments will be at 8%.  That’s now your goal.

Step 2

Every time you get a pay rise or cancel an expense payment, increase your mortgage payment.  If you got an increase (after tax) of $40 per week in your pay, increase your mortgage payment by $40.  Did you just cancel your cable TV and get a cheaper streaming channel? Use the savings to increase your mortgage payment.  Did you just pay off a Hire Purchase or Car Loan?  Those payments can now go onto your mortgage.

You will be surprised how often we receive these little increases but use them to buy unnecessary things.  Smashed avocado is getting most of the blame these days!

Step 3

Make sure your mortgage is setup correctly to allow you to pay extra money without being penalised.  We could write a book on correct mortgage structure (it would be a very boring book!) but for this purpose, you will probably want to use a Revolving Credit account so you can put extra money in without incurring a break fee.  Make sure you don’t have an eftpos card attached to this account, otherwise you will just spend the money.  The goal here is to overpay the mortgage remember!

Summary

Make it a goal for this year to get your mortgage payments up to an 8% mortgage.  It’s ok if you can’t do that now.  Make it a goal for the near future.  Investigate what you could remove from your expenses to increase your payments.  You may like to check out our blog on the amazing budgeting Pocketsmith app or go to Pocketsmith.com.  (Note, we don’t receive any compensation from Pocketsmith, we just really, really love it and it’s NZ friendly!).