In the last 30 years mortgage rates have fluctuated. Investors need to take note of what are now, record lows. If you are planning to start or expand your property portfolio, now is the time. According to the Ministry of Housing and Urban Development, 600,000 people are currently renting, with the same number anticipated to increase, as Kiwis overseas return home and large deposits are still required to purchase a home. Following the global financial crisis, in August 2008 floating rates peaked at 10.7%. Since then they have been trending downward. As of June 2020, mortgage rates are at a record low of 3.7% (for a two-year fixed according to the RBNZ) creating incredible opportunities for people considering scooping up investment property. (Note, some banks are offering rates much lower than this.) We sat down with Kiri Barfoot to get her thoughts on mortgages for investment properties and she had some interesting insights.
As the market settles post pandemic both locally and globally, banks are being very cautious about lending large sums so you need to mentally prepare yourself for a lot of paperwork. The exact criteria will vary depending on the bank, but you will need to show proof of income including any revenue streams other than your employment. Those that are self-employed will need to show proof of earnings for possibly years back, to give the institution confidence in their ability to repay. Currently, banks may also consider your field of employment as well. For instance, if your income depends upon tourism, you are considered more of a liability than a solicitor.
Most lenders will require a minimum deposit of at least 20%. So if buying a house worth $800,000 you’ll need a deposit of at least $160,000. There might be some exceptions such as the First Home Loan Scheme, which requires a deposit of 5%. However, this last scenario may not apply to investment properties. If you already have a property, it is best to use its existing equity to secure a mortgage. Think about your appetite for risk and calculate what you may receive as a return before you start property hunting, so you know how much you are willing to spend. Don’t get in over your head. Be conservative, especially if you are purchasing your first investment property.
In April 2020, The Reserve Bank decided to remove mortgage loan-to-value ratio (LVR) restrictions for 12 months. The decision was made to ensure LVR restrictions didn’t have an undue impact on borrowers or lenders as part of the mortgage deferral scheme implemented in response to the COVID-19 pandemic. Given that banks have more discretion in regarding a deposit, since this development there are people securing a loan with as little as 5% down. However, you would need to be very, very, qualified to get a deal like this and your interest rate will likely be higher. Still, it never hurts to run through different different scenarios with your mortgage manager or relationship manager.
Most people select the lowest rate, generally that is a one or two-year fixed or floating. Keep in mind that if you select a fixed-term, should you want to exit early, you will incur break fees. However, occasionally, competing institutions may pay your break fee in order to secure your business. A fixed-term gives you certainty of repayments.
I firmly believe that property is one of the best investments out there with much more stability than the sharemarket for example. Still, there is some financial exposure if you choose this route. You need to sit down with a professional advisor, and figure out what you will receive in revenue after your mortgage, insurance and rates are covered. If your yield is lower than what you would generate in interest from leaving it in a bank or KiwiSaver, then now may not be the time for you. Capital gain is not always guaranteed. Know also that maintenance will cost around 10% of your rental revenue annually, and that Healthy Homes improvements usually hit around the $5,000 plus mark, for heat pumps, vents and installation and insulation for an average three bedroom home. Some banks are giving interest free loans for Healthy Homes improvements regardless of whether a property, is a primary residence or an investment property which could take some of the burden off landlords for these expenses.
That is a loaded question as there are so many variables to consider. On average, Auckland rental properties are now delivering a gross yield above most mortgage interest rates. The gross rental yield for a typical Auckland rental was 3.27% through April and May 2020, when the market also saw many special fixed-mortgage rates dip to historic new lows to under 3.00%. This means a balancing is taking place, even a shift, between the cost of borrowing and the potential gross gain on a rental property.
In my reviews of gross rental yields by suburb over recent years, the southern, western and northern areas of the city tended to perform best. At a suburb level, nearly 60 Auckland locations are delivering a gross yield above 3.00%, and 12 above 4.00%, with suburbs south of Auckland city making up the bulk of these.
Reviewing data kept since March 2015, the average gross yield has been as low as 2.85% in late 2016 - when average mortgage rates were approximately 5.60% floating or 5.10% fixed for two years, and as high as 3.54% in March 2015 - when average mortgage rates were approximately 6.60% floating or 6.00% fixed for two years.*
Barfoot & Thompson calculates the gross yield figure by comparing the average annual revenue from 3-bedroom** tenancies to the average price of 3-bed homes sold by the company over the past six months. So, with the average rental price for a 3-bed Auckland home at $584 per week, or $30,368 a year, and the average 3-bed sale price over the past six months at $938,688, the gross yield is 3.27%. The average gross yield has recently been as high as 3.47% (November 2019), however, recent increases in residential sale prices have seen the figure edge slightly lower. While this number represents just one calculation a potential investment buyer should consider, it is a change worth noting.
Barfoot & Thompson does not assume any responsibility for giving legal or other professional advice and disclaims any liability arising from the use of the information. If you require legal or other expert advice you should seek assistance from a professional adviser.