Unless the housing market and mortgages is your bread and butter – like it is for John Bolton (more commonly known as JB) from Squirrel Mortgages – the mortgage market can be a bit of a minefield, especially now as the economy is having a bit of a ‘moment.’
To help you make sense of it all, our own Hannah McQueen, financial coach and founder of enable.me – and no stranger to the housing and mortgage market herself – sat down with JB to discuss what’s going on, and what we could expect to happen in the not-too-distant future.
Below is just a taste of what was discussed, if you’re keen to listen to their whole conversation you can do so here.
What’s the goss on where interest rates can be expected to go?
The expectation is that the OCR will continue to increase. How high it will go continues to be hotly contested but JB predicts it will get to 4% in November and stick around at that level for a while before coming back down.
This increase in OCR rates is impacting mortgage interest rates, and one of the reasons it seems to be hurting so much is that many borrowers are coming off ~2% interest rates, and in just 12 months’ time these rates have more than doubled. And, it’s having the desired effect (from an RBNZ p.o.v. anyway) as people who are being hit with these high-interest rates curbing discretionary spending.
JB also doesn’t think that bank interest rates will jump up much higher either. According to him, the OCR increases are already priced into the fixed rates and with the market already pricing the OCR to go to 5% those rates don’t necessarily have much reason to climb any higher – especially if his prediction of the OCR not going much higher than 4% is on the money.
So, should I buy now or wait for 6 to 12 months hoping prices will come down?
When it comes to this question – it’s really less about when you get into the market, but rather your ability to stay in the game and hold onto that property. While we can never quite know what the housing market will do in the next week, month or even six months, we do know that over the medium to long term, they will increase in value. Though this increase in value isn’t necessarily linear due to how the property cycle works.
The other thing to consider is that the OCR determines the rates that the banks are testing your ability to service that loan. As the OCR goes up, so do those testing rates, meaning you may be able to borrow less.
So, more than the current interest rates you need to be thinking about your ability to borrow, and your ability to hold that property – and make sure you’re picking the right property to begin with.
Is lending harder to get right now, or does it just seem that way?
No, it’s not just your imagination. And this is a conflation of a few different factors.
Banks are more nervous about lending now as the housing lending market is deemed a bit risky. And this is on top of the CCCFA regulations which have had the banks going through your bank statements with a fine-toothed comb to assess serviceability.
This also makes attaining an investment property a little trickier as you not only require the deposit, but you also need to prove to the bank that you’ll be able to service the loan. With tax deductibility being removed from existing properties your after-tax rental income dwindles significantly, meaning you’ll need more surplus cash flow than you might otherwise (and it’s one of the many reasons we recommend buying a new build for investments). Banks are also testing serviceability on Principal and Interest, though investors will generally have the mortgage on their investment property set to be paying interest only.
Are there any silver linings?
There’s always a silver lining. While inflation can be uncomfortable in the short term, in the long term it’s very good for asset pricing. On top of this, inflation and borrowings are a match made in heaven as the value of your debt is reduced. Whether you have $100,000 worth of savings in the bank or $100,000 as a mortgage, with 7% inflation, in 12 months’ time it’s actually only worth $93,000 in terms of its buying power. So, rather than fearing inflation, just understand where it benefits you and where it doesn’t.
When it comes to mortgages and headwinds the best way to manage it is by setting your strategy for dealing with the current environment – do you refinance to a new bank, how long will you fix for, should you restructure, or are there ways you could pay it off faster? You also need to understand whether you’re trying to grow wealth ahead of retirement and whether an investment property will help you with that – and then the mortgage strategy you would need to apply to support that.
Whether it’s for your family home, your first investment property – or your umpteenth – if you need some help deciding on setting your mortgage strategy book a consultation with an enable.me coach to see how we could help you get mortgage free, or how we can help you secure additional lending and get you on your way to growing wealth.