As we head into winter the most pressing thing on Property Investors’ minds seems to be the Reserve Bank, or at least the things they control – interest rates, LVRs (loan to value ratios) and now a new thing, Property Investors as commercial entities.
Interest Rates
As expected the Reserve Bank did hike the OCR to 3.00%, marking the second 0.25% rise in as many reviews and it appears as though it is still set to rise to around 4.50% over the next two years – subject to several things occurring.
Internally the big one is inflation, mainly attributed to the economic recovery/rebuild. New Zealand retains the two speed economy i.e. Auckland/Christchurch versus rest of the country, however the rest is starting to catch up on the back of general improvement in the economy with dairy, manufacturing and tourism doing well.
Externally the world is in recovery mode too, however it is fragile and a slowdown in the China boom or Ukraine-type situation could quite quickly change the speed of recovery.
With rates on the move we have been very busy fixing people for the most part on two and three year rates, which have always been very popular with Kiwis even though the strategy of rolling over annually appears to offer good value for money over time.
With the banks being very aggressive trying to win in the under 80% LVR market we have seen a real flattening of the yield curve. With ASB increasing the one year rate to 5.95%, the gap between the one and four year rate is now only a tiny 0.64 points. In the last week I’ve obtained a three year fixed rate of 5.95% against carded rates as high as 6.85% and we also saw a 6.59% four year special introduced by Westpac – the first such special that I can remember in a very long time, at least seven years I would say.
A split facility is probably a good way to plan your mortgage with some floating and the rest spread over two and three years fixed. Everybody, of course, has a unique set of circumstances which need to be considered so the one size fits all scenario does not work. For this reason, please do not hesitate to contact me if you require any guidance at all regarding this.
The big thing is negotiate, negotiate, negotiate. With the number of house sales down and likely to stay lower over winter, the bank will continue to fight over business in the under 80% LVR space.
LVRs
A little normality has returned to this space with good quality loans being quite easy to place. The initial reaction from all the banks was to tighten their belts an extra notch or two more than they needed to, and also there is now a public perception amongst first home buyers out there that they cannot get a 90% loan and have therefore given up. This is a shame really as I was even phoned by a bank last week asking for 90% business – a real turnaround from a few months ago.
With so many young people now having some very solid Kiwisaver balances it can be quite easy for them to hit the 10% deposit mark. Investors too have had good capital growth, so investors looking at 90% lending is not entirely out of the question.
The Reserve Bank and Commercial Investors
Many people have been enquiring about the announcement by the Reserve Bank that as of 1st July 2014 they will be treating people with five or more properties as commercial investors rather than residential investors. I have spoken to several contacts within the main banks and no one has been able to provide any specific detail on this. Further, when I attended a presentation by Grant Spencer, the Deputy Governor of the Reserve Bank, the topic was raised but he had no detail either.
In general, commercial property loans have three differences to housing investment loans:
The interest rate for commercial property loans is typically around 1.00% higher.
The LVR is capped at 65% and interest only option is harder to obtain.
The 15 year amortisation rate/repayment term – this is the real biggie.
The first two, while quite serious on themselves are probably not as serious as the third, as this of course will increase servicing to unrealistic levels for most investors.
The problem is that the banks don’t seem to know whether one or all of the commercial policies will be forced upon the Property Investors. My gut feeling is that it will only be the interest rate margin that will be imposed as the banks make their money by lending it, and they won’t be lending much of it if points two and three are introduced. Only time will tell.
Should you have any mortgage requirements or questions, please do not hesitate to contact Tony Mounce Mortgages www.tonymouncemortgages.co.nz or ph 0800 Mounce.