What Are The Banks Doing And Why?

Unless you are a financial news junkie (like us), the recent bank changes would have been easy to miss. But there have definitely been changes. Rupert breaks them down for us.

Here are just a few of the key changes:

• One bank won’t lend on a construction project if it is for investment reasons;
• One bank won’t lend over 70% on any home if you have even one investment property in Auckland;
• One bank has recently reduced it’s maximum interest-only period to five years (a move other banks made last year);
• Several banks have raised the rate that they calculate your affordability at (now at the upper seven per cent);
• One bank has removed the special interest rates if the lending is against an investment property (investment property at this bank will be 0.2-0.5% more expensive than on a personal home);
• Almost all banks have scaled back on lending to foreign investors.

So why are the banks making changes?

Remember a month or so ago when the Reserve Bank mentioned that they would look at an Income-to-Debt Ratio? Essentially, you wouldn’t be able to borrow over, for example, five times your annual income. This would be very bad for banks, especially at that lucrative upper crust (the >$2m houses).

So the banks’ responses have been to show the Reserve Bank Governor that they have levers that they can pull, other levers, levers that show they are holding back from irresponsible lending without turning the tap off all the way.

There will be more changes to follow. The banks will undoubtedly continue to make proactive changes to convince the Reserve Bank to leave them alone. Stay tuned.

Rupert is an Authorised Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.

Gulp! Income-to-Loan Ratios are on the Horizon!

You can think of the Reserve Bank as an increasingly angry parent and you, dear Auckland property purchaser, have been a very naughty boy.

You’ve been stuffing the capital gains candy into your mouth for the past four to six years and you’ve been inviting your wealthy friends around too often, the ones with those Asian-sounding names. 

Papa Wheeler has been doling out gentle punishments for the past six months, following a firm-but-fair attitude to parenting. If your foreign friends don’t have IRD numbers and bank accounts, they can’t come over and play.

Well, last week, you were given another warning and I would take this one on board because if Mr Wheeler dishes it out, there will be much wailing and gnashing of teeth.

In case you missed it, Governor of the Reserve Bank, Graeme Wheeler, strongly indicated that the Reserve Bank is looking at income ratio restrictions. This would mean you couldn’t borrow more than a certain multiplier of your income (probably around five times). So if your household earns $100k, you wouldn’t be able to borrow more than $500k.

Is this a good idea? Well, the answer is the same as all answers in economics: it depends.

The problem, at least in Auckland, seems to be coming from a housing shortage, not from people wantonly borrowing because they can. If they want to upgrade they have to borrow more but they’d prefer not to.

In my opinion, Governor Wheeler doesn’t actually want to pull this lever. The Reserve Bank is simply using the media as a way to scare the market into re-thinking its property craze.

And it’s worked a little. It’s got the financially literate circles of society talking about it. It’s got friendly mortgage advisers (who may or may not be included in the aforementioned circle of society) talking about it. We’ve even had one bank decline a construction loan because they were afraid the new income ratios would be implemented by the time the house was built (we can’t tell you who it was but we can tell you their name rhymes with Ray-Ren-Tsed).

My advice is to watch the rules, stay informed and behave yourself.

Rupert Gough is an Authorised Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.

Buying Property With Your Mates

Most Kiwis have the property itch.  Some have full-blown property eczema. So much so that we can often resort to relying on friends to help with the scratching in order to get our property buying financed. Rupert explores the ins and outs of this common approach.

 It’s part of our culture that we must own a house somewhere, no matter what the cost. And sooner or later, most entrepreneurial types look toward getting a group of friends to pool their funds and begin purchasing properties. 

 The reasons for this are usually one of the following:

•          Not having enough equity to purchase by yourself

•          Not having enough income to purchase by yourself

•          Telling people you are part of a “property syndicate” makes you feel awesome (these people will eventually buy themselves some sort of flashy BMW)

•          You particularly like to, metaphorically (and sometimes literally), smash your head against brick walls as a form of investment.

History is littered with smart people who decided to set up a group of buyers.  And for every graveyard of cleverly structured LTCs that are owned by trusts that are owned by corporate trustees, there is the one anecdotal company that made it.

I get it. In fact, I’ve done it (I’m a resident of the graveyard). It’s a massive ego stroke to turn up and purchase a property and begin the project that will start the financial snowball rolling.

And, believe it or not, I’m not here to talk you out of it.  But I do have some suggestions as to how you can make your life a lot easier and increase the odds of succeeding:

1) Not all banks like property syndicates.

Some require each person to be able to individually service the loan (in case the rest of the directors leave in a huff). These banks are no good to you at all. You need to go to a bank that tallies up the income and deposits of all participants and treats them as one entity.

2) Set up the legal structure early. 

Like, months beforehand. If you need a trust, get it sorted before you start looking at property. It’s a really expensive exercise to change legal structures afterwards (not to mention, it can void the finance preapproval if you change the investment vehicle at the end).

3) If you’ve got someone with bad credit, don’t make them a guarantor.

The one bad fruit spoils the whole bunch and can crash the deal with the bank. The person with bad credit should instead be treated as a silent investor and shouldn’t be part of the mortgage.

4) Set everyone a role or form committees.

Some might handle the renovations, some might handle the accounting, some might handle the negotiations. But, importantly, don’t let everyone handle everything or you’ll have five different opinions on what pattern the new bathroom wallpaper should be.

5) No money. No say.
While we’re on the subject of unwelcome opinions: For partners … just as in life … the rule remains that if they’re not an owner then their opinion is not required. Otherwise you’ll now have 10 patterns of bathroom wallpaper

6) Do the maths.

Last of all, before you pull the trigger, ask yourself why you’re doing it. Do some solid maths around the value of your time, the return on your money, the tax implications you are opening yourself up to and the risk that you are exposing yourself to and how much risk you are willing to accept.

And if the maths checks out, here’s the next link you’ll need: http://www.bmw.co.nz.

Rupert Gough is an Authorised Financial Adviser with Velocity Financial. No investment decision should be taken based on the information in this blog alone. A disclosure statement is available free of charge upon request.