Category: News

Interest rates are on the way up – how long should I fix my mortgage for?

People often ask us what is the best term to fix their lending for.  A question even more common with interest rates looking to be on the rise, or at least unlikely to go any lower.

The answer is very dependent on your circumstances. 

Recent interest rate increases have been driven largely off the banks having increased cost of capital; it is costing them more to borrow money from overseas so it is costing you more to borrow money for your home loan.  Based on the Reserve Bank’s official cash rate (OCR) forecasts and given the banks have already built in increased capital costs to the current interest rates the one year rate probably offers the best value at present….  

 

The reason the one year rate offers the best value at present is that the difference between a one year and five year rate is currently 1% or more.  The projected rate of interest rate increase means you will likely be better off fixing your rate every year on a one year fixed rate over this period rather than fixing for 5 years at today’s rates.

This is of course by no means guaranteed and doesn’t mean this is the interest rate you should lock in. 

At Eightfold we encourage people to think about what their plans are over the next few years and how much they value certainty.  If certainty is important to you, then longer term rates are the way to go.  There are many reasons why it is worth locking in longer terms, for example your risk appetite or planned changes in your circumstances.

Structuring your loans correctly is another area where Eightfold can help.  We can look at if a revolving credit facility is a good fit for you as well as looking at if you will have the desire and funds available to make lump sum payments.  We will also look at ways you can take advantage of the current low interest rates to pay your debt off faster. 

To discuss your personal circumstances please email or call one of our advisers today for a no obligation free chat.

What is causing the slowing housing market?

There has been a lot of publicity lately about the slowing housing market, particularly in Auckland. Commentators generally credit the introduction of the of the Reserve Bank’s investment property LVR rules in October 2016 as the main reason. While there is no doubt that this has had a major impact there has also been a noticeable tightening of the credit rules that banks apply when assessing your ability to borrow for a home loan. It is likely in our view that this has also had a significant contribution to the slow down.

 

A quick tally up of the notices we get as Brokers, shows that there have been more than 10 significant changes to bank home loan credit policy since October 2016. Generally, the banks do not publicise these changes and consumers only find out about them when they apply for a home loan. Often these changes can result in a home loan being declined whereas 12 months ago the home loan may have been approved.

 

Some of the changes include:

  • The banks are being more stringent on how they assess your income, especially if it’s not guaranteed, for example commission or bonuses.
  • How the banks calculate your general household expenses which they then use to determine your ability to service a loan. Banks are generally assessing household expenses at a higher level than previously, which is then likely to reduce the amount each household can borrow
  • Increasing the base interest rate that banks use when assessing your ability to borrow. Wisely, banks add a margin to the current interest rates to allow for a potential increase in interest rates. This margin stress tests your ability to repay the loan under a higher interest rate. These rates have increased but each bank is different in the margin they actually apply.

 

Importantly, and as we have mentioned each Bank has made its own changes and they have not all made the same tweaks to their credit policies.

 

Other factors impacting on the slowing property market include the election as investors wait to see who will govern and what policies they may bring in that may affect the viability of rental investments in particular.

 

So, is this the start of a big price correction?

At Eightfold we don’t believe so. There is still fundamentally a supply issue in Auckland, not enough properties for those who need them. This being the case it seems unlikely that there will be a major correction anytime soon. It is more likely that we will see smaller increases or decreases in value rather than the rampant inflation of house prices we have seen in recent years.

 

What does that mean for you? Is now still a good time to buy?

The key to buying property is to have a long term view. Auckland property has historically doubled in value approximately every 12 years. So even if you purchased now and experienced a small decrease in value, in the medium to long term the value of your property is likely to increase.

house price graph

Navigating financing your property has certainly got a little more tricky and a bit more time consuming, however you can take the hassle out of it by contacting an Eightfold Financial Services Group advisor for a free no obligation chat. It is our job to keep abreast of the changes and understand the best way for our customers to finance or refinance their property.

 

To get in touch, give us a call on 0800 881 886 or visit our website, www.eightfold.co.nz

 

New Year Financial Health Check

A new year sets us off with good intentions of doing better this year. We’ll eat less, exercise more, we’ll get on top of our finances. While we’re not much help when it comes to the diet and exercise, we can help you get on top of what is normally your biggest financial commitment – your mortgage. Paying off your home loan quicker is one of the best ways to create financial freedom so that you can start putting your money towards your other big goals and dreams.

 

We often hear in the media how if we just gave up buying a coffee each week, packed our lunch or gave up takeaways we could be making a significant dent in our mortgage. But how do we actually make that sacrifice pay off and get to see the difference to make it all worthwhile?

 

If we assume that by forgoing buying a few coffees and lunches you manage to save an extra $50 a week, how would that impact on your mortgage?

 

Mortgage:                                           $300,000

Interest rate:                                       4.5%

Term of loan:                                      30 years

Fortnightly payments:                        $701

 

If you can pay an extra $100 off your mortgage a fortnight then you will save over $63,000 on the total cost of your mortgage and knock 6 years off the term.  You have to admit that, that makes the sacrifice seem worthwhile.

 

Unfortunately in Auckland a $300,000 mortgage may seem like a dream for many and just making the required payments is a struggle. So how else can you get ahead on your mortgage?

Refinancing to take advantage of some of the sharp one year fixed rates, while maintaining your current level of payments may be a good option.  If you could achieve a .25% drop on your interest rate and maintain your current level of payments you could knock a year off your mortgage and save $30,0000.

Mortgage:                                           $300,000

Interest rate:                                       4.25%

Fortnightly payments:                        $701

 

With a saving like that, it could be a good idea to give your Eightfold advisor a call to check whether you could benefit from this saving without incurring any break fees.

Just think if you could combine refinancing at a lower rate and paying an extra $100 a fortnight you could save over $80,000 over the life of your mortgage and knock seven years off the term – now that is some serious savings!

 

The structure of your loan can also help you pay it off faster – if you are disciplined.

Revolving credit or off-set mortgages allow you to offset your funds against your daily interest which should minimise the amount of interest you pay. The danger being, that the funds are still available in your account and it can therefore be tempting to dip back into them to fund a renovation, holiday or new car.

If you are on a floating rate, including a revolving credit/off-set mortgage, you are also able to make additional lump sum payments without incurring any break fees.

So while there are many benefits of being on a floating rate, there are some very sharp deals to be had on short term fixed rates which may also suit your needs.

The best option to establish what is going to work for you, is to have a chat with your Eightfold advisor and they will help work out the best way to structure your mortgage to get ahead.

 

Keys to success:

The first step in making a plan to get rid of your mortgage quicker is to understand your loan agreement with your bank.

  • Are you on a fixed rate?
  • If so, when does it expire?
  • Is there any facility within your loan agreement to make extra regular or one off payments?

Your Eightfold advisor, can work through this with you and help you understand the best strategies to get on top of your mortgage.

 

Keeping on track:

Now while it seems logical to give up the café coffee or to make the effort to pack a lunch we all know as we get further into the year it gets harder to maintain that motivation.

Eightfold provides a calculator on our website that allows you to see the benefit of extra regular or lump sum payments on your mortgage. However if you want to keep a running tally at your fingertips, then you may want to look at one of the many mortgage tracking apps that you can install on your phone or tablet.  These include

  • Mortgage Payment Calculator – looks pretty good I think!
  • Mortgage calculator plus – good for working out impact of extra payments
  • Mortgage Payoff Tracker – allows you add extra payments made to see benefit – can’t seem to add in a continuous payment as far as I can work out

 

If you’re serious about taking control of your mortgage and getting it paid off faster, give you Eightfold advisor a call on 0800 881 886 and we can help you make a plan to achieve your financial freedom.

Buying your first home

There has been a lot of media attention recently about how difficult it is to buy your first home in Auckland. This is of course absolutely correct. The biggest barrier to a lot of people is the deposit.

Banks have restrictions on how many people they can lend to with less than 20% deposit. This means that the people they do lend to in this category pay a premium to borrow funds. This is further complicated by the fact that the banks’s appetite for lending will move from week to week, depending on how much lending they currently have with less than 20% deposit.

This change in appetite is because the banks are limited to doing 10% of their lending to those with less than 20% deposit.  The number of drawdowns a bank is completing will determine how much they can lend to those with less than 20% deposit.  The banks criteria are based on serviceability, deposit amount, bank history and other factors.  The importance of each criterion can move constantly to make sure they are lending to the highest quality applicants possible in this space.

Eightfold advisers can help in several ways.  We can give you an honest assessment of where you are at and not only advise if your bank will help but if any other banks are currently lending in this area. We can also walk you through how family assistance can be used through gifting or provision of equity.

There are also exclusions to the 20% deposit rule which can mean it will be easier for you to obtain finance for certain types of property.  For example, as long as you are buying direct from the developer, new builds are generally exempt from the 10% threshold for bank lending for those with less than 20% deposit.

If you are a member of Kiwisaver there are also some key features that may help you into your first home. Kiwisaver offers both

  • The Kiwisaver first home withdrawal
  • The Kiwisaver Homestart grant

The Kiwisaver firsthome withdrawal allows those who have been a member of Kiwisaver for at least three years the option to withdrawal all or part of their saving to put towards buying their first home.

The Kiwisaver Homestart grant provides eligible first home buyers with a grant of up to $5,000 for individuals and up to $10,000 where there are two or more eligible buyers to put towards the purchase of an existing home. If you are purchasing a brand new home these numbers are doubled to $10,000 for individuals and $20,000 when there are two or more buyers. Your Eightfold advisor can work with you to advise if you may be eligible to take advantage of these opportunities

So is now a good time to buy? Getting on the housing ladder is the hard part, so really as soon as you are ready is the best time to talk to an Eightfold advisor about getting into your first home. While the market may slow in the short term due to impending elections, tightening credit controls or other factors; over the long term the property market in Auckland has doubled in value every approximately every 12 years. So even if prices were to drop slightly in the short term, over the medium to long term the value of your new home is more likely to rise.

I encourage you to call one of the Eightfold team on 0800 881 886 to discuss your circumstances and how we can help you get into your first home today.

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