Forget four letter words, there are three letters on the minds of most homeowners at the moment – OCR. If you’re a first home buyer, you’re probably just as interested in that other three letter word… LVR.

Whatever your stage of the home ownership journey, take a gander at The Property Market’s Quarterly Market Update for Auckland. In it, Antonia Baker, founder of The Property Market, asks four of Auckland’s top mortgage brokers for their take on the local property market, as well as their thoughts on trends and predictions around home lending.

Antonia Baker:

What do you think will be the major changes to the property market in the next 6 months?

Campbell Hastie – The Go2Guys
Two words sum it up – further cooling. There’s a strong perception out there that fixed mortgage rates will go up and this, combined with the fact that it’s an election year, is likely to make buyers think longer and harder before committing. This won’t mean a downward slide for house prices, but it will soften the increases we’ve been seeing over the last couple of years. As the market cools, I think we may see fewer auctions and more sales by negotiation.

John Bolton – Squirrel
I think the market is slowing down – people are less confident about property than a year ago and, while there are still plenty of buyers out there, many of them are sitting on the fence when it comes to purchase decisions. That’s a function of uncertainty created by OCR increases, an election in September, and the ongoing impact of LVR restrictions.
There is still strong immigration and a lack of new homes being built, which overall benefits sellers, but I think homeowners have already seen the greatest proportion of increases to the value of their properties. As interest rates increase affordability will become a bigger issue.

Rebecca McCallum & Keith Jones – FPNZ Advice
At the moment there are two opposing factors in play in the Auckland region. On one hand, a property shortage (currently about 10,000 homes in Auckland) has been driving up prices. On the other, the rising OCR (official cash rate) will mean higher mortgage interest rates, which will slow buyer demand. That being said the building industry is in full swing trying to bridge the housing gap by opening up subdivisions. The un-met demand for building of new homes means prices will continue to rise. The net result is that prices will continue to rise, but not at the same rate as they have over the last couple of years.

Stuart Wills – Mortgage Link Auckland
In Auckland, I don’t think the industry will change a lot – the housing shortage means property will continue to get more expensive across the board. Also, as business confidence rises, I think we may also see more price movement at the top end of the market – in the $1 million plus bracket.

Antonia Baker:

What is your advice to current borrowers? (ie people who already have a mortgage and who might be thinking of restructuring)

Rebecca McCallum & Keith Jones – FPNZ Advice
For clients whose fixed rate is coming to an end this year, we would in most cases advise fixing for a longer term – generally between 3 and 5 years. It is widely anticipated that the interest rates will rise by 1-1.5% over the next 18 months, which means the current 3 year rate of 6.85% is likely to be 8.00% by the end of 2015. If a client took the current 5 year special rate of 6.89%, while an expensive option for the next six months or so, it could well end up better value over a five year period. Everybody’s circumstances are slightly different though and therefore it is our role as mortgage advisers to have a thorough consultation with a client before providing a recommendation.

Stuart Wills – Mortgage Link Auckland
Whatever the interest rate situation, you should structure your mortgages with a view to reducing your debt as fast as is realistic – if you can channel another $50 or $100 a week into your mortgage, or make an annual lump sum payment, do it! We’re doing a lot of work with clients to restructure their lending in a way that consolidates non-core debt and gets everything paid off faster.

John Bolton – Squirrel
Right now, there’s a really competitive environment amongst the banks – they’re all trying to retain market share. With the OCR increase, I think interest rates will initially rise and then settle around the early to mid 6s later this month.
With that in mind, while you can still fix for below 6%, I’d be fixing for a combination of 2 and 3 year terms – that’s where the best value for money is. If you currently have lending on a floating rate, again I’d recommend fixing for 2 to 3 years.
For those who are worried about the impact of an interest rate hike on their ability to service their loans, I’d suggest thinking about going for a 4 or 5 year rate. The 4 year rate in particular is currently sitting around 6.3%, which is really good.

Campbell Hastie – The Go2Guys
Don’t panic, get advice and know your numbers!
An important distinction which many borrowers don’t understand is that an increase to floating interest rates (as has been the case following last week’s OCR announcement) doesn’t necessarily mean an immediate increase to fixed rates as well.
What is really important is to stay on top of your household budget, and plan in advance for future increases to your rates – fixed or floating. A good mortgage broker will work with you to ensure you’re well placed to anticipate future rises.

Antonia Baker:

What is your advice to people thinking of buying?

Stuart Wills – Mortgage Link Auckland
My key piece of advice would be to budget on slightly higher rates, as the rates we’re currently seeing are lower than average. It’s a good idea to structure your loan to include a flexible facility, which can act as a backstop if need be.
At the moment, if clients go directly to the bank, it seems they invariably end up with a lump sum mortgage on a 2 year rate. We would advocate having a small flexible facility and then splitting the remainder of the loan over two periods – that way you don’t ever have all your lending coming off a fixed term at once.

John Bolton – Squirrel
The old saying about ‘zig when others zag’ applies! Despite what you might read in the press, now is not a bad time to be in the market. There is less competition in the form of buyers, so your chance of getting a property for a realistic price is better than it was last year.

Campbell Hastie – The Go2Guys
We’re entering a period of less pressure, which is great news if you’re a buyer. If you are in the market for a new home, don’t be afraid to make conditional offers and take your time to make sure you’re making a good decision.

Rebecca McCallum & Keith Jones – FPNZ Advice
The two most important factors we take into consideration are a client’s income/ deposit and what is the client looking to buy ( i.e what type of property). For first home buyers, we may be able to secure a loan at a 90% LVR but we need to balance this against higher loan related fees and lending costs. Often we’ll ask if family members can contribute in order to get closer to the 80% threshold so we can negotiate better terms. Borrowing a little from family members may only be required for a short period like 6-24 months.

Another discussion we have is around affordability. Can we save the client more money by fixing for longer? Are they borrowing more than they can afford? The budgeting aspect needs to be discussed in depth before clients commit to a loan, likewise we would have a discussion around insurance to ensure something is put in place to pay the mortgage should clients health or life circumstances prevent the mortgage payments being made.

As registered financial advisors, we have a duty of care to our clients and we need to ensure they are well advised – whether it’s around affordability, or something like whether to bid at auction (a more risky way to buy) or what to do if a property has unpermitted works.

Antonia Baker:

Are there are any watch outs for buyers in the current trading environment? (ie any changes to the banks’ lending criteria which have come to light recently)

John Bolton – Squirrel
Things are reasonably stable at the moment and the Reserve Bank appears comfortable with how things are panning out, so I don’t think we’re likely to see any real changes to credit policy in the next 6-12 months. Sadly for first home buyers, I wouldn’t bank on LVR restrictions changing in the short term.

Campbell Hastie – The Go2Guys
If you’re a first home buyer, here’s some good news – banks are doing loans over the 80% LVR mark! Having said that, these aren’t easy to get (the conditions are much stronger), so I wouldn’t recommend a DIY approach. A good mortgage broker will help you negotiate these conditions and package your application to highlight the strengths of your financial position, ultimately increasing your chances of success.

Rebecca McCallum & Keith Jones – FPNZ Advice
Homes built in the prime ‘leaky building’ period, (1995 to 2005) are incredibly difficult to obtain finance approval for, so we always recommend our clients consider a building inspection on a property if we have concerns over the property they are interested in. Another consideration is that, as Auckland grows and new suburbs emerge, buyers need to be really aware of what the land they’re buying on is apt to do – for example, if the terrain is steep, could it pose a stability issue? Or, is it low lying and potentially liable for flooding?

Different lenders have different lending policies. For example, one bank may limit a loan to a maximum of 85% on a property whereas another may restrict the maximum to 65%. One bank may limit a client’s maximum loan to $400k, where another would allow the same client to borrow up to $500k.We can help borrowers target the right bank for their lending needs.

Stuart Wills – Mortgage Link Auckland
I always warn people not to get suckered in by the upfront incentives the banks offer – a free TV or a credit card with a big limit are not great reasons to choose a mortgage provider!

With regard to lending criteria – I think credit terms at the moment aren’t too bad. I have a theory that the current LVR restrictions (whereby banks are limited to doing a maximum of 10% of their new lending at over 80%) is The Reserve Bank’s way of pulling the banks into line after they ignored all the warnings and continued to do over 30% of their lending in this space, after The Reserve Bank had asked them to curb the high LVR lending. The initial indication was the banks would be allowed to do up to 15% in the over 80% space, but this was limited to 10%, which I believe was The Reserve Bank flexing their muscle. These days, when the OCR increases, you’ll see that the retail banks bring their rates into line very quickly – I reckon that’s their way of saying ‘we’re listening now!’ Watch this space as this policy may get relaxed a little later in the year – maybe to 15% where I think it was planned to be.

Learn more about us at thepropertymarket.co.nz and, if you’re thinking of selling your house, give us a call on 09 965 3656.