NZPI Magazine Column – September

 

 

 

September Column

New builds don’t need to be a pipe dream

If you’re looking for a way to start your property portfolio but struggling to obtain the requisite 35% deposit, have you considered new builds?

They are exempt from LVR rules, as well as having other benefits such as less initial maintenance, attracting higher quality tenants and potential for a more attractive yield. New builds can be in the form of traditional construction lending, where the loan is disbursed in staged payments, or a turnkey where you pay a small deposit at the start and the rest on completion. Great if you still have rent or other mortgage payments while you build.

The exemption can also apply to top-ups arising from construction cost overruns during the build, but it doesn’t apply to borrowing for extensions of existing properties or expenditure such as furnishings. New builds are an excellent option for first home buyers and investors alike.

Here’s an example of how they can work:

Mr & Mrs Smith are your typical New Zealand couple with a joint income of $120,000. Their owner-occupied house is valued at $500,000 with a mortgage of $200,000. The loanable value of their home is 80% of the valuation, so $400,000. Less their existing mortgage, this leaves $200,000 as a deposit.

If Mr & Mrs Smith want to buy a rental property that is an existing house worth $450,000, the 35% deposit needed would be $157,500. So, Mr & Mrs Smith can buy one rental property.

But if Mr & Mrs Smith were to look at two new builds worth $450,000 each (total $900,000), a 20% deposit would be $180,000. With Central and Local Government and the Reserve Bank all encouraging new builds, and these being exempt from the LVR rules,  Mr & Mrs Smith can buy two rental properties (subject to bank servicing criteria being met).

In this instance, let’s say the rental income was $450 per week for each property. Add this to the personal income of $120,000 and it does meet Banks’ servicing criteria.

The New Zealand one year swap rate in early August 2017 was 2.03 per cent, compared to 2.01 per cent at the start of August this year. In comparison to the same time last year, there has been a drop of 0.02 per cent, meaning rates are flat and largely going nowhere. Interest rates are even showing signs of easing.

We have recently managed to obtain a one year fixed rate as low as 3.99% from a New Zealand bank, and with the August OCR announcement remaining unchanged, these low rates may be here for even longer.

If you would like to discuss whether a new build is a viable option for you, please get in touch with the team at Tony Mounce Mortgages & Insurance. We would love to chat about how we can review your position and help you achieve your property goals.

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