In recent years, the Reserve Bank has been working on reducing the amount of Interest Only mortgages in New Zealand. In the article below, we look at how it affects you as an investor.
Responsible Lending
In our opinion piece, “is it time for banks to rethink their Interest Only policy?”, we looked at the latest statistics out regarding Interest Only vs P&I mortgages. At the time, Interest Only mortgages made up 27% of the existing mortgage market.
The Reserve Bank’s requirements to reduce Interest Only have worked to a certain extent. In August 2016, Interest Only mortgages made up 38% of new lending. Just 2 years later it is 31%. You would expect new lending to be higher than existing because of the time limits placed on Interest Only loans (see below).
There is a place for Interest Only
Interest Only mortgages aren’t inherently bad. Take the example below of an investor that has a $300k mortgage against their own property and $600k mortgage against their investment property.
The wrong way and the right way to pay off a mortgage.
They have 2 options for paying down their mortgage over 30 years:
- Option 1, the one denoted by a big red cross, is to pay all accounts down via Principal and Interest payments. Over the term of your mortgage (in the example, 30 years), you will slowly reduce these accounts down to $0.
- Option 2, handily marked with a glowing green tick, is to place the investment mortgage on Interest Only and pay down the personal mortgage at an increased rate.
There are no extra points for guessing which one we think is the good option.
Result
If the total mortgage payment is the same, the result is the same. You will pay your mortgage over 30 years under both options, however in option 1 you are reducing your tax deductible interest payments which means you could be missing out on tax refunds. Option 2, however, keeps the maximum tax deductions in place as long as possible.
These tax expenses can add up to thousands of dollars every year.
The problem with the green tick
But there is a problem with option 2.
In the example above, the investor is going to take about 14 years to pay down the personal ($300k) mortgage and the remaining 16 years will pay off the investment ($600k) mortgage. But banks these days only allow you to be Interest Only for a maximum of 5 years (2 years on your own property). After that, you are required to start paying all accounts on Principal and Interest even if you are over-paying other parts of your mortgage (as in option 2).
And plenty of our clients are striking this problem. As they approach the 5 year mark, banks are demanding the clients begin to pay Principal and Interest.
If, after an explanation of your “option 2” strategy, the bank refuses to extend the Interest Only period, the only way forward is to refinance your lending to another bank which allows you to reset the 5 year Interest Only period. This is not the optimal outcome but is something we’re seeing more and more.
For the right reasons
If you are going to refinance to another bank because your Interest Only period is up, you must make sure that the structure at the new bank is correct. In the example above, this client would refinance after 5 years but must continue to pay down the mortgage over (now) 25 years. Any other outcome is worse for the mortgage holder.
Are you affected by this?
If your mortgage is:
- a mix of owner-occupied and investment and the investment portion is on Principal and Interest or,
- you are about to be moved from Interest Only to Principal and Interest
you need to speak to your mortgage adviser and your Accountant. The review will take around an hour and the whole process should take about 3-5 hours of your time. If you can save a few thousands of dollars per year for 5 hours work, we highly recommend you do it!
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:
- KiwiBuild – what is it?
- HomeStart Grant and KiwiSaver basics
- What can you afford? How can you prepare for getting a mortgage?
- When do you get your Solicitor involved?
- How does the auction process work?
- How does purchasing work if you are borrowing over 80%?
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
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:
- KiwiBuild – what is it?
- HomeStart Grant and KiwiSaver basics
- What can you afford? How can you prepare for getting a mortgage?
- When do you get your Solicitor involved?
- How does the auction process work?
- How does purchasing work if you are borrowing over 80%?
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
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:
- the purchase price &
- the rental income per week
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.
Auctions can be a little bit overwhelming. They’re meant to be. It’s why they result in higher prices for the Vendors. To help ease the stress, here are 6 quick tips you should consider before going to bid on a property you love.
Quick auction tips
- Go to other auctions first so you know how they work.
- Have a firm idea of your maximum bid. Auctions are meant to get you excited and in the moment. Bidding without a price ceiling can lead to severe buyer’s regret!
- If you need to change the settlement date, let the Real Estate Agent know well in advance. This is often possible but needs to be signed off by the Vendors.
- Much like the settlement date, if you don’t have the required deposit – usually 10% of the purchase price – let the Agent know well in advance (at least 3 days). This will need to be approved by the Vendors.
- If you have any questions beforehand, don’t hesitate to talk to the Agents at the auction. They want bidders so they will be happy to help you through the process.
- Always keep in mind that when the hammer falls, and you are the last bidder, you have unconditionally bought a house (assuming the bidding has met Reserve). The property will need to be signed off by the bank before the auction. This means sending us a copy of the auction documents 3 working days before the auctions. The bank will have questions about any disclosures or unusual clauses in the auctions documents.
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:
- Rupert Gough – CEO of The Mortgage Lab and author of The Successful First Home Buyer
- Mat Page – CEO of Financial Design Group
- Ann Cochrane – Legal Executive for Simpson Western
- Cynthia Klenner – Harcourts Real Estate Agent – Glenfield
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:
- KiwiBuild – what is it?
- HomeStart Grant and KiwiSaver basics
- What can you afford? How can you prepare for getting a mortgage?
- When do you get your Solicitor involved?How does the auction process work?
- How does purchasing work if you are borrowing over 80%?
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.
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:
- KiwiBuild – what is it?
- HomeStart Grant and KiwiSaver basics
- What can you afford? How can you prepare for getting a mortgage?
- When do you get your Solicitor involved?
- How does the auction process work?
- How does purchasing work if you are borrowing over 80%?
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.
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:
- bad credit history (even if it has been paid)
- >80% LVR borrowing
- significant reliance on rental income or government benefits for income
- self-managed builds
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.
Well, the news is in and we now know a lot more about the eligibility for KiwiBuild.
Income Caps
The maximum income one person can earn is $120,000. For a couple (or more) the eligibility criteria states $180,000. We are assuming this will be measured in the same way as the HomeStart Grant. That is, the previous 12 months must total less than $180,000 (or $120,000). This is an important distinction. An applicant could have recently had a raise that pushes them over the limit but because they have earned less than that in the past 12 months, they will still meet the criteria for a limited time.
Owner-Occupied Home
The purchaser must live in the house and “intend to live there for 3 years”. We can see the wording for this clause being changed to make it more restrictive. Of course, everyone will say they “intend” to live there. Potentially, a loss of capital gains would ensure that people didn’t take advantage of this.
Price Caps
If you live in Auckland or Queenstown, there is 3 levels of pricing for houses.
- One bedroom houses will be priced at a maximum of $500,000
- Two bedroom houses will be priced at a maximum of $600,000
- Three bedroom houses will be priced at a maximum of $650,000
Anywhere else in the country will have a maximum price cap of $500,000.
How to register your interest
After checking your eligibility for KiwiBuild, you can complete the form here to register your interest in the KiwiBuild. There are only a few questions.
Now what?
When the ballot opens, you’ll want to have finance approved. Under the previous Affordable Homes Scheme, pre-approval was a requirement to enter the ballot and we don’t see this programme being any different.
- Check your eligibility for KiwiBuild Scheme
- Enter your details into the registration form here
- Begin the process of getting pre-approved for a mortgage
Our thoughts
The government has come up with some interesting solutions to the original problems that KiwiBuild faced. It has tackled the worker shortage by investigating a migrant visa related to skills in the construction industry and seems to be looking solidly at the prefab construction market to supply the houses.
We remain skeptical regarding the possibility of being able to process the increased number of consents. One solution to this has been for the government to complete the consents “in-house” taking the pressure off the councils. This is undeniably a terrible idea. Although Councils can be slow, they still have the best knowledge on consent processes which are in place for a reason.
At the end of the day, even if this is a stretch-goal and only, for example, 70,000 new houses are created, the first home buyer market will have significantly benefited from the endeavour. It will also have served to get the pre-fabrication industry more established which will help construction long-term.