Articles by Kris Pedersen
As little as a month ago, many economists were predicting that it would be mid to late 2022 before we see the Reserve Bank raise the Official Cash Rate (OCR). This situation has rapidly changed with the market now pricing in a 90% chance that the rate will increase at the next review date, which is 18 August 2021. If this happens it will be the first increase the market has seen since 2014.
Inflation and interest rates
Inflation has jumped to a much higher level than had been expected and is now the highest it has been for 10 years, with new housing building cost inflation the highest since 1987.
Banks have quickly moved with interest rate rises across the board. While the longer-term rates had been trending up courtesy of events happening overseas, and in particular the United States, the short-term rates had been expected to stay low. This hope has quickly vanished with the 1-year rate, which had been a favourite across the market, jumping on the back of the expected OCR increase.
The Reserve Bank has also signalled an end to the Large Scale Asset Purchase (basically money printing) programme, with this finishing on 23 July. They had been doing this as a strategy on the back of Covid to put downward pressure on interest rates, but realise now that they do not need the same level of stimulation with the economy being stronger than expected.
There are also further dark clouds on the horizon with the increased capital requirements for banks being imposed in July 2022. These are expected to result in interest rates being pushed up. This change was originally meant to be implemented July 2021, but has been held off because of the pandemic.
What should property investors do?
Savvy property investors who would like more leverage may want to look at non-bank lender Select Home Loans. They can lend above the 60% LVR threshold that banks are limited to on existing investment properties. At 70% LVR their current rate offering in the 2-5 year bracket on their prime product is roughly the same as what banks are offering.
With many more investors looking at ‘new build’ opportunities on the back of the change to interest deductibility, ANZ have also come to the party, copying ASB’s release of a product targeting this area and beating ASB with a floating rate offering of 1.68%. This rate will naturally move up if the OCR does increase next month as expected. However, this will still be a lot cheaper than standard floating rate offerings.
Another point to keep an eye on is what banks decide to do in regard to their test rates. These are the rates that banks use to determine a borrower’s maximum level of debt they can obtain. Naturally if they move these up, borrowing capacity decreases. Because of this risk, right now is the time to look at reviewing options, such as interest-only and other aspects of how mortgages are structured.
If you’d like to talk to Kris Pedersen about your loan structure or new borrowing, you can contact him here.
Hi Salesh, I just wanted to send you an email on behalf of GRA to say how fantastic we have found your company to date. As you know, Ben and I joined GRA a couple of months ago and have just found you so amazingly helpful in getting our new property set up correctly and sorted out. We have what I would consider a rather complicated structure as a result and it’s a fantastic feeling to know that we are getting everything done in the best way possible. We have just had approval to put a minor dwelling on the property which will make a massive difference in terms of cash flow and obviously value, something we would never have even thought of without GRA and which we are very excited about. During the buying process we attended a seminar with Matthew and from the outset thought he was fab. We therein signed up for property school and found this nothing short of fantastic. The content was relevant, up to date and comprehensive, but more importantly it was taught in a way that we could actually understand and really get value out of. I wanted to mention also, that everybody GRA have recommended to us has been just so efficient and absolute masters at what they do. A wonderful network of people that we feel very lucky to now be able to call on. From Kris Pederson and Bryan Rist who put our mortgage together to the insurance guys they then referred us to, I’m super impressed. Within GRA, Ellery has probably turned things around for us faster than I’ve ever known before, something which we appreciated so very much when it came to crunch time. She’s always a pleasure to deal with and again, we’re stoked. We’ve just settled on the property today and are about to go and get the keys. I’m pretty pumped and hence this email is probably rather excitable. So, a massive thank you to you Salesh, the partners for such a fabulous 6 weeks at property school and everyone at GRA for their help. May this be the start of our property empire. Thanks again, - A & B - July 2015
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