Growing your property portfolio or waiting for mortgage interest rates to drop?
Find the right balance, property market can be beneficial to sellers and buyers at different times.
Sellers – when the property market is gaining more attraction due to increase in demand therefore making a gain on the sale.
Buyers – when there is a drop in the purchase price of the properties due to economic circumstances i.e. over supply of properties, desperate sellers.
High interest rate environment does make decision making a challenge. Looking back at mid-2023, the property values was at the lowest since COVID.
Around this time, properties would have been sold at bargain or somewhat which we may not have expected, and if you have bought around this time, you would have realized the win.
Since Mid of 2023, property values are steadily climbing, it has been forecasted by economist that prices could rise up to 10%*.
Most of 2023 was faced with cost-of-living crisis, high interest rate, high inflation rate, and the fact that RBNZ was pushing on OCR to bring down the inflation between 1 – 3%***.
With the recent inflation data out, showing that the monetary policy settings are working, it could trigger banks to discount the interest rates, with recent evidence of ASB revising their longer-term mortgage rates****. It is just a beginning; more banks would embark on this journey to make mortgages affordable, but the question is when?
No one has a crystal ball, however it has been signaled in the market for possible rate cuts later this year, but the buyers are preparing from now, as the moment the interest rates drop, you may need to find that additional 10% of the purchase price.
Question for you?
- Did you want to save the additional 10% and use it wisely towards another investment project?
- Did you want to spend the additional 10% and win on the interest rate?
To bring this in perspective with 10% property growth:
| Property type | Standard residential (3-bedroom) | Standard residential (3-bedroom) |
| Purchase price | $750,000 | $825,000 |
| Year | 2023 | 2024 |
| Lending at 80% | $600,000 | $660,000 |
| Lending at 90% | $675,000 | $742,500 |
| Indicative interest rate** | 7.75% | 6.79% |
| Total interest annual interest cost at 90% borrowing | $52,312.50 | $50,415.75 |
- Based upon this assumption, more funding/ utilising your own savings is required to settle in 2024 compared to 2023 for the same property.
- At 90% lending, additional $67,500 would need to be borrowed to complete the purchase in 2024 rather than leveraging the equity from the property to boost your portfolio by adding another property. The consequences of additional lending would be associated with the interest cost.
- At 90% lending, additional $7,500 deposit would be required in 2024, which is the lost sum of money which could have been utilized to beautify your property.
- There are many elements that needs to be considered such as social, political, economic factors however amongst these broader factors, one must consider their personal objectives. For example, just focusing on current interest rates could make you divert you from long term property growth.
Remember:
There is no perfect world, the timing is important but the most important is getting a pre-approval on finance because the same principals on achieving the lending quickly, fast and lesser documentation is history.
Mortgages tend to be on 30-year term, during this time you will find upward/ downward movement, and if you could tackle is part of the equation then your road to property ownership becomes feasible.
Make a plan • Stick to the plan • Execute the plan
Reference:
- *https://www.nzherald.co.nz/nz/nz-and-auckland-house-prices-what-can-we-expect-from-the-market-in-2024/WAASNTETRFGVRJHG27D5345QGM/#:~:text=Hold%20on%20to%20your%20hats,to%20continue%20beyond%20next%20year.
- **interest rates quoted on assumption basis.
- **https://www.rbnz.govt.nz/hub/publications/bulletin/2019/rbb2019-82-03
- ***https://www.interest.co.nz/personal-finance/119324/responding-recent-changes-wholesale-rate-shifts-asb-has-adjusted-its
Disclaimer: The article should not replace or used as a substitute for personalised financial advice. It is recommended that you seek independent financial advice based upon your needs, goals, and situation. SK Financial Group and their employees cannot be held accountable to the information in the article. Indicative interest rates have been used from external websites; we are not responsible for accuracy of data. Please check our disclosure statement on our website for full information, alternatively you can contact us for full disclosure, terms, and conditions.