It's been a rocky start to the year with the Auckland floods and Cyclone Gabrielle wreaking devastation on Hawke's Bay. These recent weather events will have a negative impact on the economy, creating supply shocks that may further increase inflation and the OCR.
So what does this all mean for home buyers and owners?
First home buyers
Inflation and interest rates are high, and demand for housing is slowly dropping. There is still the potential for a good bargain; however, house prices are not declining in every area. In some locations, the property market is still strong (based on supply and demand). Overall though, 2023 is the year for the first home buyer - if you look carefully, there are deals to be had.
The downside? Lending criteria are strict, and you will likely have to jump through hoops to secure finance - overall, household income has to be strong to get pre-approval. Lending right now is difficult but possible, but you must plan - don't leave it last minute. We recommend getting the ball rolling at least six months before you want to buy.
If you don't qualify right now, don't panic. We have financial advisers specialising in first-home buyers who can start prepping you now.
Loan structuring
In the last six months, we've engaged with many clients who have received home loan structuring advice that didn't factor in their long-term needs. From what we're seeing, some mortgage advisers assumed that interest rates would remain low or go even lower, which has been to the client's detriment.
We've been busy helping to restructure lending and alleviate financial pressure related to rising interest rates. At Finsol, we take a logical approach and spread risk wherever possible (especially if the home loan will be long-term), except in specific situations where the property will be sold within a year.
With many of my clients that have bought in the last few years, I have personally structured their mortgage spread over five years, and only a portion of their loan has been exposed to the current rates, so they can weather the storm and continue on. However, with interest rates rising from 4% to 6.5%, many people are financially struggling and want to go on interest only.
Property investors
It's going to be a challenging year. Tax implications on interest deductibility are starting to kick in, hurting cash flow. Most likely, overly leveraged investors will need to sell properties. If you're an investor and want to know what to do to get through this period, look at your portfolio and see how you can improve your cash flow.
For example, I built a minor dwelling on my property in Napier and now have two houses on one property creating income. Creating a solid cash flow can help you pay down your debt and take the hit of interest rates. What can you do better? Can you subdivide? Can you add another dwelling? Get creative. There is potential to buy property, but there are limited opportunities. Many investors are pulling back to ride out the storm.
All borrowers need to understand that the OCR can flip at any point in time. The driving factors are labour shortages and supply constraints (which are long-term problems). There must be a change somewhere where the government opens immigration to welcome more labour and seasonal workers. The cost of living is also rising, and after the natural disaster in Hawke's Bay, there will be a flow-on effect after the destruction of a large number of orchards and crops.
Interesting times are ahead, but it's not all bad news.
Don't leave lending until the last minute - you must prepare before looking for a property. Lending right now is challenging but doable with lots of prep.
This article is for informational purposes only and should not be considered as financial advice. It is always recommended to consult with a qualified financial professional before making any financial decisions based on your individual circumstances.
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