So, the question that remains on prospective purchasers minds is.... Is it a good time to buy?
My first question to anyone who asks me this is - how long are you looking at holding this new property for? The answer to that is almost always "long term", and this generally means; 5 years plus in which case; what is going on right now in the current market will have been forgotten by then and potentially a good capital gain would have been made on the property purchased.
I want to have a look at the facts and also want to have a look at the speculation around this topic of whether or not buying now is a good idea:
FACT
- Rates have decreased quite significantly recently making money cheaper than it has been in a while
- Property prices have dropped
- Banks are tightening up criteria for higher lending deals i.e 90% plus – BUT, it’s NOT impossible – 100% deals are even still being approved.
I strongly believe that if you are going down the 100% route; it is all in the way you structure your mortgage; 100% mortgages are absolutely fine if you buy an appropriate property and if you structure the mortgage in such a way that equity can be created in the shortest space of time. - Buyers market is still very apparent.
Meaning - first time buyers are not shoved out of the way like they would be in a booming market - they have time to make a comprehensive decision and act accordingly.
- Property prices have bottomed out or have yet to bottom out
Nobody really knows the answer to this question – are they going to continue on a downtrend or are they just going to stay stagnant for another 12-18 months? - Banks will stop lending altogether for a period of 18 months
I don’t believe this at all. - Banks will call in existing mortgage debt
I don’t agree with this at all. - Interest rates will fall further
Who knows, it seems to be looking like they will but have you got a crystal ball I can borrow because I dont' think anyone actually knows.
What I am trying to get at with all this takes me back to my original question – how long are you in this for? If it is long term and let’s face it, property is usually and should be long term; then depending on the type of deposit that you have and your overall situation; you would structure the mortgage in a way that the risk of purchasing property in the current market is negated.
3 comments:
I note your current article on NZGirl regarding 'Jodi' buying a second/investment property.
I am somewhat amazed that you did not advise her to give considerable thought to the reasons for this action right now.
After all, working on your figures, you are advising her to become involved in an investment that will cost her a negative cash flow of $158 per week plus probably another $60 a week in rates/insurance/maintenance expenses.
And for what reason? The burning ambition to subsidise the living costs of some tenant she has not yet met? or the expectation that the property will rise in value at a rate that will offset this cash outflow?
The rise in value may have worked in the last 10 years, but maybe the game has changed, maybe there will be no gain in property values for quite a few years. I feel you should have explored this aspect of the proposal and also advised her of the possible consequences of a flat property market on her investment decisions.
Karen M
NZGirl.co.nz Article:
Dear Jodi,
I’ve got a mortgage and I was lucky… I brought a house about four years ago, got a great deal and managed to pay off a chunk while earning pounds and renting it out etc.
Now I am looking around and seeing some amazing deals on the market. Just last week the two bedroom house across the road from us came up for sale. It’s going for less that the Government valuation (a STEAL). And I was really toying with the idea of buying a second home. My friend brought a house with cash for $90,000 less that what it was on the market for!
It seems to be a buyers market, and I’d love to bag a bargain. However, how silly is it really to buy now? Can I actually afford it? Will the banks lend me money? My place is worth approx $400,000 but I only have $250,000 on mortgage (weird how we say ‘only’ when it’s about a ¼ of a million dollars!). Can I afford to buy another $400k home?
Do I need to look at something smaller? What will the mortgage payments be? Is the renter market going to help or hinder my plans?
Thanks,
Greedy Torbay
Hi Greedy Torbay,
How silly is it to buy now? Not silly at all! In fact I think now is the very best time to buy and my reasons for this are as follows:
1: Now is a time when interest rates are coming down at quite a drastic rate enabling you to obtain rates that haven’t been available for the past two-three years.
2: Now is a time when there are lots of properties and few buyers therefore as a buyer, you can negotiate far better discounts off the purchase price.
3: Now is a time when you as the buyer, have more time on your hands to make an informed decision on the property you wish to purchase and not rush into anything like you would have to in a seller’s market.
For more information on why I think it is a good time to buy check out my blog - "Is it a good time to buy?".
Can you afford it? I can’t answer that until I know you incomings and outgoings but as a generalisation the first question I would ask you is; what would you have spare on a monthly basis to top up a new mortgage? And whatever the answer to that question is, is what I would base the purchase price around and therefore the new mortgage amount. The idea of an investment property is to ensure that the top up portion that you would be paying is affordable, otherwise you could end up in a very tight and scary position which is obviously not the outcome we want.
Will the banks lend you money? With your existing home being worth $400,000, you are in a very strong position from an equity point of view, if you only have a mortgage of $250,000 against it; this means that you are only mortgaged at 63% which is great! So again, from an equity point of view; purchasing another property worth $400,000 is possible however without seeing any income and expenditure details I can’t give an answer on if the banks would lend another $400,000. Have a play around the Westpac website, they've got great morgage calculators and rates, and free guides and checklists to help you out.
In an appointment with me I would actually look at incomings, outgoings etc to find out what you could comfortably afford and this would answer the question on if you needed to look at something smaller. Mortgage payments on a $400,000 mortgage would cost around $608/week Interest Only and this is based on a 7.90% one year interest rate. After an assumed rental income of say, $450/week, you need to be comfortable of the top up amount of $158/week ($608-$450). Of course this isn’t taking into account other property costs such as rates & insurance which you would also need to look at.
In regards to the rental market – I recommend that you talk to Property Managers and do some research. Find out what tenants are looking for, where they are looking etc, and have this information assist in your decision on what property to purchase. This should increase your chances of keeping the property occupied which is essential.
Hope this has all helped!
Happy house hunting!
Jodi
Hi Karen,
Many thanks for your comments here.
Generally property is viewed as a long term investment, something that is going towards your retirement and contributing to your wealth creation plan, and as such sometimes a top up (negative gearing) is required, no different to contributing into a pension. This is why I made the statement in the NZgirl piece that "they would need to be comfortable with the top up amount". Without seeing income & expense details, I am limited as to what I can advise here.
Also, I feel you might not be taking into account the taxation benefits that would occur in this case which would pretty much put this property in a cash-flow neutral position after tax. This sort of advice is not what I would delve into too much on the NZgirl site for fear of confusion for the readers.
Thanks again for taking the time to comment.
Regards,
Jodi
Post a Comment