Mortgage Archives - Mortgage Advisers - Mortgage Lab

Maybe you’re in Auckland with your deposit ready to go for a house.  Or maybe you’re looking to purchase your next investment property.  For fun, we scoped out TradeMe to see what a million dollars buys you at the moment.  The difference is… vast.

Auckland

It will come as little surprise to you that a million dollars doesn’t buy you a whole lot.  For our largest city, you can get this 125sqm, 2 bedroom home in Point Chev.  The section is 347sqm.


Tauranga

You get a little more bang for your million bucks in Tauranga.  The section is a little bigger at 481sqm, the floor area is almost double the size at 240sqm.  It has 4 bedrooms and is brand new.


Wellington

At about the same floor size, a million dollars gets you a Tauranga comparable.  This house is 190sqm and on a slightly larger 533sqm of land.  It has 3 bedrooms, which is less than the Tauranga house but it also has what Wellington excels at… views.

  


Christchurch

As we move further down the country, a million dollars takes on a whole new meaning.  Scroll up, look at that Auckland house again.  Now realise that the same amount of money buys you an 898sqm section and this castle.  The ad doesn’t say what the floor area is, but it has enough parking for 6 cars and the photos show enough living-room area to swing a cat.
(Additional note, Mortgage Lab does not condone cat swinging)


Dunedin

A million dollars buys you not one, not two but three flats in this very large property in Dunedin.  With a total floor area of 390sqm, it is over 3 times the size of the Auckland property.  The ad also tells of about a 10% return which I would also guess is about 3 times the Auckland property.  Whether the long-run capital gains could match or even come near Auckland is the reason some will choose this villa and some will choose one of the others above.


A long-term hold

Speaking of capital gains, we thought it would be fun to see what we could have bought with a million dollars 100 years ago.  It’s hard to find good property details but we did find the Statistics Yearbook from 1918 here.  In 1918, you could have bought:

Until recently, selling a house by Auction has been the most popular method of selling in Auckland.  It takes advantage of the excitement in the market and pits buyers directly against each other. In most of the other cities and towns around NZ however, selling a house “price by negotiation” has remained one of the more popular methods.  With the cool down in the Auckland housing market, we are beginning to see this trend start in our largest city too.

So what does price by negotiation mean?

Price by negotiation indicates the vendor is willing to take an offer at any time.  It differs slightly from a Deadline Sale where a vendor will accept all offers up to a certain date.  Price by negotiation is an open-ended timeline.  However, once an offer has been submitted and conditionally accepted, further offers must wait for that initial deal to be cancelled before their offer can be accepted.  Even with price by negotiation, it pays not to wait around too long.

How to get ready to make an offer?

You should ideally have your finance pre-approved before making an offer.  An offer without a finance clause is a much stronger temptation for the Vendor.  If you’re competing against other offers, the less conditions on the offer, the better.  You all know where to click to get the pre-approval stage started!

You should always get a lawyer to check the offer before submitting it.  A Sale and Purchase is a legally binding contract.  Even a small mistake can cost tens of thousands of dollars.

What happens once your offer is accepted?

If you have conditions – finance, building report, valuations etc – in your offer, then you will have a set amount of time to get these ticked off before telling your Solicitor to go unconditional.  At this point, you will need to pay the deposit into the bank.  The deposit is usually 10% but can be varied and is not usually refundable if you want to pull out of the deal.  Going unconditional is not to be taken lightly so check with your Solicitor before confirming.

Summary

There are some pros and cons of buying a Price By Negotiation property

Pros:

Cons:

We found a nice simple process chart here courtesy of our friends at The Property Practice.  We recommend you check it out before you begin organising your pre-approval.

 

Join The Mortgage Lab, Share NZ and Kendons Accounting for an hour  of industry learning.  We’ll also have beer tasting from Boneface Brewery Co and catering by the award winning Island Bay Butchery.

Best of all, you’ll earn LBP points for attending.

Where: Mitre 10 MEGA, Upper Hutt
(in the Trade Drive Thru)
When: Wednesday 14th March 2018
Time: 4:30pm
RSVP: terri.maguire@sharenz.com, 0275 0275 19

Click here to download the brochure

Have you heard about KiwiBuild?  Jacinda Ardern’s Labour government is promoting it’s programme to build 100,000 affordable homes and apartments over the next 10 years.  Here’s what we know so far and our predictions for the KiwiBuild programme.

Of the 100,000 KiwiBuild dwellings, 50% will be in the Auckland area with the remainder spread throughout the country.  This seems reasonable as the main demand pressure has historically been on Auckland. The government has indicated it will achieve this 100,000 target by utilising crown-owned land and purchasing new homes / apartments directly from developers.  This will be similar to their acquisition of State Housing that has gone on for decades now.  

Developers will most likely get priority treatment for the consent process if they agree to selling a percentage of their development at an “affordable” rate.  At the moment, affordable is defined as $600,000 for Auckland and $500,000 for the rest of the country which is in line with current HomeStart Grant levels.

The now closed SHA Scheme also allowed priority council consent if 10% of any development met the affordable criteria.  In this case, the level determined as affordable was a complicated calculation of the median sales in the area which often ended up as a bizarre number like $541,811.  And it was continuously changing.  It’s great to see the government is going with an easy to remember, round numbers figure this time.

The rules for on-selling the property are looking to tighten too.  Currently, to use your KiwiSaver, you just have to commit to living in the property for 6 months.  Until recently, no one was even checking this although lately a dozen or so people have been found to be living elsewhere and received penalties for this.  

With the new KiwiBuild programme, the government will take any capital gains from the sale of the property if the sale occurs in less than 5 years.  In my opinion, this is a great way to tackle the issue.  It’s easy to monitor, and doesn’t force people to continue living in the house under duress as long as they are prepared to walk away from any capital gains.

I think the main problem is going to be finding 100,000 houses in the next 10 years.  Not just finding the land but also finding developers that are prepared to sell part of their project for, what could easily be, below the cost to build.  

Let’s look at the 50,000 new affordable houses and apartments in Auckland.  And let’s imagine every single (!) developer opted to sell 10% of their development under the KiwiBuild programme.  That would mean we need 500,000 new houses and apartments to be built in Auckland in the next 10 years (or 50,000 new dwellings in Auckland per year).  The current all time high for nationwide consents is 40,000 in 1967… Nationwide!  It just doesn’t seem likely that Auckland is suddenly going to go from approximately 9,000 consents in 2016 to 50,000 consents in 2019. 

You can read the Statistics New Zealand report here.

Maybe it’s a stretch goal; which is fine, by the way.  And any attempt to get first home buyers into affordable homes is a great goal.  Other feedback from property industry professionals has questioned the ability to find the labour required to complete the KiwiBuild programme.  

At the end of the day, we hope the government can achieve this goal, maybe through some amazing change in council efficiency and vigorous training towards labour.  We’ll certainly be looking forward to helping 100,000 families into new affordable homes!

When you’re buying a house, there are a lot of things to think about.  One of the steps that is often a mystery for our clients is conveyancing; ie; what happens with their lawyer.

We spoke to Krystle Gardner from Gardner Barristers & Solicitors and asked her a few of our clients most common questions:

When do you first need to make contact with your Conveyancing Solicitor?

I strongly suggest that you make contact with your Solicitor as soon as you make the decision to start looking to purchase.  Earlier is better when you are selling your existing house too.

Making contact with your Solicitor this early will mean that you can move quickly should you find a house you like.  You can then confidently put an offer on it whilst also enabling your solicitor to work with you, and the Real Estate Agent, to make sure that you take all legal steps needed including the very important review and approval of the agreement for sale and purchase.

We’ve heard it can take a few days to process the legal documents.  What takes so long?

Agreement for Sale and Purchase

If you are buying your new house through a negotiation process (i.e. not at auction), there are a couple of steps that need to happen. The Real Estate Agent needs to prepare the draft agreement for sale and purchase and provide this to your Solicitor to review.  They will include any conditions of the purchase and approve the agreement before it is provided to the Vendor as an offer.  This process can take 24 to 48 hours depending on other demands.  Upon your offer being accepted by the Vendor, the condition process starts.

The condition process involves you working with your Mortgage Broker and your Solicitor to sort out a home loan with a Bank.  You’ll also carry out the legal enquiries on the house to make sure it is a good investment.  In addition (and at a minimum) you would also be:

The timing is a little different if you are buying your new house at an Auction.  In this case, your Solicitor will work with you to carry out the legal enquiries (legal due diligence) on the house well ahead of the auction.  Your Solicitor will also review the Agreement for Sale and Purchase prepared by the Real Estate Agent for use at the Auction.  This will mean you can confidently bid at the Auction and sign the agreement to purchase the house on the day.

Home Loan Documents

The bank, after providing your mortgage adviser with final approval of your home loan, will send your Solicitor a letter of instructions which enclose all your home loan documents.  For a basic home loan structure (i.e. not involving a Trust, Company or Guarantor) these home loan documents will usually include:

Your Solicitor will review the above home loan documents, and prepare any of the documents required by the Bank.  They will also the prepare the required Authority and Instruction for Electronic Registration of the Transfer and Mortgage Instruments with Landonline and the Tax Statement.  It’s then time to meet your Solicitor to sign the home loan documents and these additional documents.  At this meeting, they will provide you with advice on the general nature and effect of the documents.  You’ll also need a copy of your photo identification.

After receiving a copy of your insurance certificate for the new house, your Solicitor will then send the home loan documents, together with the completed solicitor’s certificate to the Bank.  They’ll ask that the money be drawn down to your Solicitor’s Trust Account to complete the purchase.

In my experience, after receiving the Bank loan instructions, your Solicitor will require a minimum of 48 hours to review and prepare the documents.  At this point, your Solicitor will be in a position to meet with you to sign these and give you the advice referred to above.  The home loan documents must, according to most Bank requirements, be returned to the Bank a minimum of 48 hours before the purchase date.  This ensures any issues can be addressed without it holding up the purchase of your new house.

Should I put my house in a Trust as well?  When would I need to decide that?

There are some circumstances in which it will be appropriate for your house to be put in a Trust.  But there are plenty of other circumstances in which it is not appropriate.  For example, the individual(s) purchasing the house intend to use part of the house as a home office or a holiday home.

Gardner Barristers & Solicitors know through experience that it is sometimes the more appropriate approach for clients to use relationship property law together with asset protection structures as the means to protect the house rather than the trust structure.

It is very important, therefore, that you seek legal advice early.  This means the right ownership structure for your circumstances is decided and established before the home loan documents are prepared.

Will you help me with my KiwiSaver withdrawal?

Your solicitor will absolutely help you with your KiwiSaver withdrawal.  They will also receive the money into their Trust Account to use as part of the purchase price of your house.


Krystle is the owner of Gardner Barristers & Solicitors in Auckland.

Phone: 022 395 9973
Email: krystle@gardnerlaw.co.nz,
Address: P O Box 35 317, Auckland 0753
Web: www.gardnerlaw.co.nz.

 

 

 

Purchasing your first home can be confusing.  The key to being ready to buy is to be organised.  Here are 3 things that first home buyers can do today to get ready to apply for a mortgage.

Order their Credit Report

Ordering your own credit report is free.  You can a nice and simple indication from Credit Simple or you can get the whole report (I recommend this) from Equifax. This second option can take a couple of weeks (my latest one turned up in 4 days though).  This will allow you to see exactly what the bank is going to see about your history.  If anything isn’t correct, now is the time to address that.

Tidy up your spending

Look through your last 3 months of bank statements.  Are you spending more than you earn or going beyond the limit of your bank account?  This is called going into “unarranged overdraft”.  To a bank, these 2 words send up a big red flag.  Once is usually ok, but more than that and getting a mortgage is going to be difficult.

You can limit how often this happens by setting up a spending account with automatic payments going out.  You’ll know exactly how much is going to be spent and how much is in the account.

Key point: don’t have an eftpos account attached to this expenses account.  You’ll end up over spending and going into overdraft again.

You can download a copy of The Mortgage Lab’s Excel Budgeting Spreadsheet here.

Get proof of your income

The bank is going to want to see your income and it won’t usually be enough to show them the money going into your bank account.  Banks like to see payslips because they show how your income is made up (ie; is it a base salary or commission).  The bank will usually want to see the most recent 3 payslips so if your HR department is a little relaxed in this area, get them working on it now.

If you are self-employed, you will need to have this year’s most recent Financial Statements (between October and March).  You can see our blog on when you need to update your Accounts.  Since Accountants are often busy, these can sometimes take a while to source so talk to your Accountant early.

Bonus Tip

If you’re ready to apply for a mortgage, it’s also time to look at your Life and Health insurance.  You’re going to be signing a contract for a large amount of money and need to make sure you can pay for it.  Find an insurance adviser who you like and feel is looking after your best interests.  We believe the best advisers only advise on insurance which is why we don’t offer it in our company.  They should be comparing several different products and choosing the one that suits you the most.

Summary

You can start getting ready to buy today by:

 

Thinking of building your next home?  Maybe you’re looking to build your next investment property?

There are a number of reasons why a newly constructed house could be a better option for you.  We’re going to take an hour and walk you through all the pitfalls.  Because we’re a mortgage company, there won’t be any hard sells or expensive contracts to sign up to; just good old information you can take away with you.

During the hour long presentation, you’ll hear:

Doors open at 6pm and the seminar will start at 6:15pm.  Parking is available – keep an eye out for our Mortgage Lab banner.

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Mainstream banks have started to respond to the LVR (Loan to Value Ratio) restrictions following the Reserve Bank’s announcement on November 29th 2017.

LVR on Investment properties

Most major banks have indicated that, as of 1st January 2018, they will begin lending up to 65% on investment properties (up from 60% this year).

Example:

Let’s say a couple have their own house and want to buy an investment property, both valued at $500,000.  Previously they could borrow up to 80% on their own home ($400,000) and 60% on the new investment property ($300,000).  In other words, the total borrowing on their $1 million property portfolio would be $700,000.

As of the 1st January 2018, the same couple will be able to borrow $400,000 on their own home as before.  But now they will be able to borrow $325,000 (65% LVR) for a total borrowing of $725,000.

Is this enough?

With the new rules, it is slightly easier to borrow to purchase an investment property.  It won’t open the flood gates but buyers who are currently just short of being able to buy may find themselves back in the market.  I think this is exactly the outcome that the Reserve Bank are hoping for.

Low (high LVR) Deposit Buyers

There has been some confusion around this change of policy.  Currently, 10% of any bank’s new owner-occupied mortgages can be lent to clients with less than 20% deposit.  In other words, those with higher than 80% LVR.

The LVR mark is still 80% however the banks can now lend up to 15% of their new owner-occupied mortgages to low deposit buyers.

And banks are already indicating how this is going to change.  One bank, who has recently declined almost all mortgages over 85%, has indicated that they are now more prepared to look at up to 90% again.

Is this enough?

A mere 5% increase in available lending doesn’t sound like much.  But the question has to be asked, what percentage of lending goes to low deposit buyers if there are no restrictions?  Of course, it’s not 100%.  A large portion of mortgages will always to be low LVR owners simply due to the nature of capital growth.

Given this, I think the change to the available lending is going to more significant than it initially sounds.  And the great news is, this is going to affect first home buyers the most (for the better).  This will allow those with a deposit hurdle more of a chance to get into the home they want.

Summary

Some exciting changes are happening to the property market.  The 2 main changes are:

 

 

 

If you have less than 20% deposit, you are referred to (by the banks) as a Low Equity (or Deposit) Borrower.  You are required to meet a different set of criteria to borrowers with 20% or more.

Understanding the requirements from the banks is confusing.  We’ve come up with the most common questions to try to make it all easier.

How much is the absolute minimum deposit that I need?

The ideal deposit for any purchase is 20% but typically, the minimum required is 10% for an existing property and 5% for a new-build.  Note: your income needs to be very good for a 5% deposit but it is possible.  You’ll also need to explain why you haven’t saved more on your good income (for example, you’ve been paying down debt).

I heard banks weren’t lending to people with less than 20% deposit any more?

Banks can only lend out 10% of their total lending to “Low Equity Borrowers”.  Note: this is likely to change from January 2018 based on the Reserve Banks latest announcements.

This means, if you are a Low Equity Borrower and you want to borrow $500,000, the bank has to lend out another $4,500,000 to other “High Equity” Borrowers.  Each bank regularly decides (usually weekly but it can be daily) if they have enough to lend out so often a “no” today can be a “yes” tomorrow.  The short answer is, main banks are still lending to Low Equity Borrowers but it depends on the day.

Another alternative is to use the Welcome Home Loan facility.  This facility is exempt from the bank restraints but you must meet certain criteria.  We have a brief article on the criteria for the Welcome Home Loan that you can read here.

Can I be gifted my entire deposit or do I need savings?

The banks want to see that you are responsible with your money.  If you have been renting and have not been able to save money, then are you likely to pay down you mortgage?  Most banks, therefore, require that you have saved at least 5% of the purchase price.  So if you are buying a $500,000 home, you would need to have saved $25,000 on your own.  The rest of your deposit can be gifted by a parent.

What counts as “savings”?

What doesn’t count as “savings”?

Can I get a loan from my parents rather than a gift?

Yes, that’s perfectly ok.  As long as you can afford the required repayments to your parents and the mortgage payments, the bank will be ok with it.  Usually, the loan from your parents would be over 5 years which can lead to quite high payments though so do your calculations first.

Summary:

A 5% deposit is the minimum you typically need for construction lending.  A 10% deposit is the minimum required for existing homes.  Most banks don’t allow a pre-approval for Low Deposit Borrowers so you have to have an offer accepted on a property before you can apply.

 

Calculating the amount of interest expected in a progress-payment contract on a newly built house can sometimes seem daunting.  In this article, we walk you through some easy calculations.

Recently we discussed the difference between Turn-Key construction contracts and Progress-Payment construction contracts.  You don’t need to worry about interest payments for Turn-Key contracts.  They are built into the price, which is why they tend to be more expensive.  The builder has calculated how much interest he or she will pay and added it on to the price of the contract.

But for Progress-Payment contracts, you begin paying money from the minute you settle on the section, and as you continue to draw down money throughout the build project.  So how much should you allow for interest costs for the project?

Progress-Payment Example:

Let’s use an example project to work through some numbers.

Section cost: $300,000
Cost to build: $400,000
Time to build: 8 months

So the section is going to settle, for example, on 1st March and, 8 months later, the house is expected to be built.  How much interest would we expect to pay?

Section cost:

From Day 1, we’re going to be paying interest on the section.  Let’s assume we will pay around 5% interest on $300,000 for 8 months.

$300,000 * 0.05 (interest) = $15,000 interest in a year
$15,000 /12 (months) = $1,250 per month
$1,250 * 8 months = $10,000

So the section is going to cost us around $10,000 in interest to hold for 8 months.

Build cost:

The builders aren’t going to ask you for a lot of money on Day 1 for the build.  Remember, it’s a Progress-Payment contract so they will only ask you for money once they’ve completed the work.

In the beginning of the project, in other words, you won’t be paying any interest on the build part but by the end, you’ll have drawn down all the money.  If you average this out, it amounts to you owing half the build cost over the whole project.  What does that mean?

In this instance, you could calculate half the build cost ($400,000 divided by 2 = $200,000) and see how much interest you would pay over that amount for 8 months.

$400,000 (build cost) / 2 = $200,000
$200,000 * 0.05 (interest) = $10,000 interest per year
$10,000 / 12 (months) = $833 interest per month
$833 * 8 (months) = $6,666 interest total for 8 months

Cost overruns:

So, for an 8 month build, we know that:

The section will cost us $10,000 of interest
The build portion will cost us $6,666 of interest

The total cost of interest for this project will be approximately $16,666.  Correct?

Actually, not quite.  In my opinion, it’s very rare for a construction company to finish a project on time or early.  If the company is saying 8 months, I would add 50% to that (in this case, that would make it a year).  There is a lot that is outside the control of the construction companies such as Council Permits and weather.  Particularly if they are building during winter.

So even though we have calculated the interest cost to be $16,666, I would expect the interest cost to be up to $25,000 to allow for the time being stretched out.

Summary:

To calculate the interest costs of a Progress-Payment contract, you need to know 3 things:

From there you calculate:

Total that all up and add some more time on to allow for unforeseen delays with construction.