Brian Dalley talks Property Profit

Is Revolving Credit Beneficial or Is The “Instant Credit” Just a Carrot?

From “The Little Black Book” Series.

Revolving credit facilities are more than just a low cost overdraught facility.

They can be and are the most basic of financial tools. However as a certain level of budgeting and self-control is involved to capitalise on the principle [saving money] many first get tempted by the carrot - spending money.

A revolving loan can save thousands of dollars in interest and help you be mortgage free years quicker, as long as you manage it carefully.

Sitting down with a young couple recently discussing their second purchase, a number of misconceptions surfaced. The meeting went for over two hours, my words here are limited so I will be brief and summarise

This was Scott and Karen’s wish list;

1. They would like to hold back $15,000 for emergencies; Scott’s Mum isn’t getting any younger and is living in London.
2. They also wanted to save and make lump sum payments at will,
3. In saying that, would also like to feel protected against possible rate hikes by fixing a proportion of the loan.

After discussing day-to-day budgets, term goals and lifestyle, we decided split the loan into three parts and the following structure was put in place with a recommendation that it be reviewed in twelve months.
 

The First Part

$30,000 on a revolving credit facility

$15,000 of the $30,000 would be immediate credit, yes essentially they were going to create a loan for $30,000 and repay $15,000. However at any stage they would have access to the $15,000 but would only start paying interest on it when drawn on. [Interest rate 5.65%]

The alternative would be to leave the $15,000 in the bank - [Kiwibank online call 3.25%].

What in fact you would be doing then is investing the money with the bank in return for 3.25% interest, less tax and in return they would loan it back to you at 5.65% as your mortgage would be $15,000 more if you had the $15,000 in savings rather than reducing your mortgage. Unbelievably it does happen.

The second $15,000 was the amount Scott and Karen were sure they could save each year and make a lump sum payment. They did not want to increase the payments as it was only a few months and Karen would be on maternity leave and again wanted to err on the side of caution. In this way they can make loan payments in line with their lifestyle and without the pressure of an increase being a condition.

The Second Part

The second loan we fixed for a period of 12 months

Which if all goes to plan, on expiry, they will transfer part of the loan balance to the revolving credit facility as the first $15,000 should have been repaid by then and keep chipping away at the mortgage.

In essence they were creating a safety net, [insurance] chipping away at the mortgage, reducing debt and if things went wrong they could extend the remaining mortgage over the loan term, which would reduce the payments required to service the mortgage.

Many are afraid to commit extra to a mortgage as recently it has been reported that some lenders are reluctant to allow the borrowers to re-draw on the buffer. In reality, that generally relates to lump sum payments.

The Third Part

The third part we fixed for a period of three years.

This decision was based largely on market predications over the medium term.

Although a revolving credit facility is the most affordable instant credit facility, on the market, it should be viewed in the same light as credit cards and overdraughts, short-term solutions that should be repaid at the earliest opportunity.

If you already have a revolving credit facility and you are not managing to reduce the loan amount, it may pay to take a closer look at what is going on.

For now you should be OK as it is one of the lower rates but as they increase you may find yourself loosing money quickly.
 

Did you know you could split your mortgage in a number of ways?

Subscribe to PropertyProfit or keep an eye out for further posts from “The Little Black Book” series…

Brian Dalley is a leading NZ Property Consultant | former NZMBA Mortgage Broker, and Real Estate Agent.

Find a Mortgage Broker near you and get Free Professional Advice

We cannot survive on an economy based on property.

I would like to challenge Dr Ganesh Nana [ the BERL Chief Economist ] on that statement, “We cannot survive on a property bubble. We cannot survive on an economy based on property.”

We are only a small island nation located in the middle of nowhere with dairy, produce and technology our main export earners. Manufacturing is not really an industry that is going to save us. Therefore, what is he, Dr Bollard and all those others chasing their tails like demented cats proposing?

Frankly, I am growing tired of the people steering the good ship [ SS New Zealand Economy ]  throwing anything to do with property overboard thinking that will save the ship from sinking.

I cannot see the point if all we are left with is a scuttled ship.

We cannot invest in one of our main export earners [ Fonterra ] only the farmers have that privilege.

Bryan Gaynor points out the banks are more willing to lend people money to buy property, rather than buy gold or shares.

OK I guess that rules out gold and shares. Shares, you would be a brave person to leap into the arena within the next 12 months. Gold, who is going to help you pay for your investment whilst you wait for it to grow in value and can you really blame lenders for wanting to invest in a sure thing?

Gareth Morgan gets a little savvier saying property is undoubtedly a good investment, “but” that is helped by tax breaks that favour property over other investments.

Unfortunately he doesn’t go on to say - “but” it is the only investment that I can think of where you can borrow 100% of the purchase price and someone else [ tenants ] will help you pay down the debt whist you wait for your investment to increase in value which over time it surely will as basic economics support that theory.

Then comes the comment from those scuttling the ship, if you keep investing in property we will take away your tax benefits.

Sorry I snigger at that comment.

The Government have opted to lease property from private investors, as they cannot afford to build the number of houses required to house those already on their waiting list. (See an example of such opportunities here.)

Surely if one puts their hand up to help why not offer a sweetener, after all there are other offshore options. My advice to those steering the ship, stop and turn the ship around and rethink what you are doing as the property bubble will not burst any time soon.

Even if tax benefits are reduced, I do not believe it will have a great impact, as the people in for the long term are there to establish income-generating assets rather than rely on the Government when it comes time to retire. 

The simple fact is the property bubble is very unlikely to get much bigger due to constraints on affordability.

What we do need, and sooner than later, is the work force returning to the building industry, which indirectly is the largest employer in the country.

Brian Dalley is a leading Property Consultant | former NZMBA Mortgage Broker, and Real Estate Agent.

Standing in the middle of the road is dangerous. Five year fixed rate 9%

Standing in the middle of the road is very dangerous as you could get knocked down by traffic from both sides.

QV figures show property values higher than one year ago - banks start increasing interest rates - housing is set to become less affordable.

Should we stand firm and brace for the impact?

As I am writing I notice two email messages arrive the first from ASB and the second from Westpac both advising they have increased their mortgage interest rates. Looking at the five-year rate 8.75% it is now believable when I say I can see 9% on the cards by March.

Many thought I was wrong in that predication six months ago and I wish they had been right.

This is what Westpac had to say this morning and I tend to go along with their thinking.  Six-month fixed mortgage rates have now risen – until now this was the only fixed term that had been left unscathed by rate increases. Now that it appears no point on the mortgage curve is ‘safe’, we could see borrowers rush to fix at whatever favourable rates are still on offer. With floating and one-year fixed rates around similar levels, there may not seem to be much advantage in fixing right now, but those who wait until they see the whites of the RBNZ’s eyes before fixing are likely to face much less attractive options. Repaying more than the minimum amount and spreading the loan over a mix of terms can help to reduce overall risk regarding uncertain future interest rate changes and that is just what we have been advising clients to do.

For example a loan just finalised was set up as follows;

• $20,000 on a revolving credit facility
• $75,000 fixed for 18 months
• $260,000 fixed for 36 months

Don’t use the above structure as a formula to base your decision on as it was a package tailored to suit that clients individual requirements.

A major point of consideration should be the impact any rate change could have on your lifestyle. Do not run your finger down the list and pick the lowest rate. Those days are gone.

Many would still have you believe that the recession is all but over and things are getting back to normal but I tend to think otherwise. Have I become a pessimist over night, not at all. Still an optimist, but things are what they are.

So back to standing in the middle of the road, what should you do?

Simple, move to one side or the other, make a decision. Do the figures and if you can afford to buy now do so and do it sooner than later.

If you are thinking of investing in a rental or two there has never been a better time.

Apparently, so I read somewhere there are 10,000 people on Housing New Zealand’s waiting list and they offer a ten-year rent guarantee.

There are always going to be risks no matter what we chose to do and sometimes it is hard to make decisions when we are not really qualified to do so but remember what  Henry Ford the car maker once said, you don’t have to know everything yourself just surround yourself with people that do.

Brian Dalley is a leading Property Consultant | former NZMBA Mortgage Broker, and Real Estate Agent.

Why are Commentators Having an On/Off Affair with Real Estate?

Just what is going on in the real estate market?  Is the recession over or not?

One minute the reports come out that there is a surge in house sales, prices are increasing, houses are selling much faster, then the amber light starts flashing on the message board;

“Spring did not bring the surge people we were hoping for”.

Well to save the traffic building up I will give you my take on the matter which is in line with previous blogs.

What we are seeing now was expected. Good quality homes in the bottom end of markets [yes there are several markets throughout New Zealand] sold quickly as property prices and interest rates fell to affordable levels.

As the cost of land in many areas [note I said the cost of land not the cost of building] makes it near impossible to replenish stock levels, the markets started to slow when stock became scarce.

Until the people that have recently purchased decide to upgrade, it doesn’t matter what season it is as the market always moves faster at the beginning of the cycle then slows down.  Seasonal fluctuations are to a large degree outdated anyway.

Added to this, the government decided to lease houses from the private investor rather than tie up millions in property development, which makes a lot of sense and with a 10 to 15 year rent guarantee the line of people waiting to invest is growing.

As all want a good return on investment that puts even more pressure on the bottom end of the market.

Just yesterday, I was in Hamilton talking with a property developer looking for affordable stock for the Mum and Dad investors that are forming a line outside my office.

Why Hamilton? It has potential for good natural growth, - one of the basic underlying fundamentals of property investing.

So where to from here for the first home buyer?

Frankly, unless someone takes heed of what I have been preaching for over a decade and reintroduces leasehold land or takes land out of the equation the market will resemble a person learning to drive a stick shift, bunny hopping along as the lower end of the market, the ‘driving force’ keeps running low on stock.

Which, I might add is starting to happen already.

We need steady sustainable growth and the only way that can be achieved is as mentioned above - Leasehold land or high decency housing AFFORABLE HOUSING.

Yes I am talking about apartments and terraced homes that the banks have in the past frowned upon.

Many Developers have learnt from their mistakes and so have lenders. Although many lenders have still yet to put the past behind them when it comes to apartment lending, it is only a matter of time before they will be forced to rethink.

We are already seeing a shift away from budget apartments resembling shoe boxes to some very nice and affordable good-sized apartments in blocks that more reassemble luxury hotels.

Five years ago, I moved into an apartment and now I wouldn’t have it any other way. Sure they aren’t for everyone but for many our way of thinking must change if owning a home is to become a reality for current and future generations.

Brian Dalley is a leading Property Consultant | former NZMBA Mortgage Broker, and Real Estate Agent.