GRA Blogs

Articles by Kris Pedersen.

It's time to review your loans

AUTHOR: Kris Pedersen
Managing Director at Kris Pedersen Mortgages

POSTED: 29 July 2021

— Views

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.

Request a Meeting

Kris Pedersen
Managing Director at Kris Pedersen Mortgages

[email protected]

© Gilligan Rowe & Associates LP

Did you like this article? Subscribe to our newsletter to receive tips, updates and useful information to help you protect your assets and grow your net worth. We're expert accountants providing expert advice to clients in NZ and around the world.

Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

Comments

Testimonials

I would like to say thank you for the opportunity for allowing me to come to the property school at Gilligan Rowe + Associates. Im in my early stages of becoming a property investor in New Zealand and to able to come to the property school has enabled to me gain very valuable information and knowledge which will help me be successful in property investing. The property school itself is one like no other because there is so much value given and from experts that practise what they are teaching. This in property school was one of the main highlights because being able to meet experts through the property school was my first time and gave me more confidence in general about property investment. Having combined reading the books (Property 101, Tax structures 101) at home and attending property school, the breath of valuable information and knowledge I have attained is substantial. - Tesfalidet, December 2019

We can help

Here's how

Gilligan Rowe and Associates is a chartered accounting firm specialising in property, asset planning, legal structures, taxation and compliance.

We help new, small and medium property investors become long-term successful investors through our education programmes and property portfolio planning advice. With our deep knowledge and experience, we have assisted hundreds of clients build wealth through property investment.

Learn More