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There is no shortage of people with opinions on the property market! When it comes to buying your first home and getting your first mortgage when is the "right" time? Realistically the stars never fully align, so you will always have one or more reasons to not buy!
For first home buyers one of the key indicators is affordability. We’ve seen interest rates fall from over 9% to under 6% in the space of 12 months and property prices fall 10% to 15%. For someone buying now, the mortgage repayments will be at least 30% lower than someone who bought the same house back in early 2008. However, in recent months interest rates have started to increase and more recently there is talk of house prices stabilising.
Housing activity is up 40% on last year (albeit off a low base) and first home buyers are finding tougher competition out there on entry-level properties. From what we see it is still a buyer’s market and will be for some time yet. That said, it will remain hard finding the right property at the right price. One thing is for sure - you will not get a great deal by procrastinating! You have to be actively looking for great buys, which means looking at lots of properties, and then you have to be prepared to negotiate. That means putting in an offer. It seems simple but if you don’t ask you don’t get. The other key ingredient to affordability is interest rates. There is a lot of confusing information out there on interest rates, which drives panic whenever mortgage rates increase. To make sense of interest rates I’d encourage you to look at the big picture. Inflation is ultimately what will push interest rates up. With that in mind, we see no tangible inflation pressure in our economy. The Government doesn’t have a lot of money to throw around, we’re in the midst of a big recession, we have growing unemployment, export prices and tourism are down, and banks have tighter lending policies.
All of this means property prices will not go anywhere in a hurry. If there is a risk of mortgage rates increasing, it is because banks are in the midst of a term deposit price war that is increasing their funding costs. As a result we could even see short-term mortgage rates increase slightly in the near-term. That doesn’t mean you should rush in and fix for five years! New Zealand’s high long-term rates have been driven up too far already by more demand than supply. Investors just aren’t happy locking their funds in for five years in this turbulent world. In other words, long-term rates have a huge “risk premium” attached to them, rather than an expectation that rates will rapidly increase. From my perspective, unless you really need the certainty of a fixed rate there is no need to rush into long-term fixed rates. My view is that the best value for money is currently the one-year rate at 5.50%. The two-year fixed rate at 6.50% implies that the one-year rate needs to get to 7.50% in a year’s time for that to be good value. Generally, long-term rates are overpriced relative to short term rates. In other words you will pay less interest over the next three to five years using consecutive short-term fixed rates than you will at current long-term rates.
If you need certainty then set your monthly repayments based on an interest rate of 8.00%. That way as rates increase your repayments do not need to change. With your first home mortgage every percentage point counts. On a $330,000 mortgage, paying (on average) 0.50% less interest over the life of the mortgage is equal to $80,000 in saved interest.
If you do one thing, find yourself a good adviser who understands interest rates and can show you how to pay off your mortgage faster. Don’t focus on interest rates and borrowing costs too much. Simply being able to buy (and buying well) is where you will make money in the current property market. For good clients with no other debts we can get lending approved all the way to 95% but you will pay more for it! We are doing 95% mortgages at around 1.00% above standard mortgage rates. 1.00% might sound a lot, but the all-up rate is still lower than any of the rates available over the past 5 years and it might get you the right house now! You never know when you might stumble over a great buy.
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