While I totally agree with the sentiment (and that sentiment is that banks are operating on reasonably fat margins right now so are in a position to pass on some of that to you) I disagree with the idea you go and threaten them with your departure in the hopes of getting a discounted rate.

That’s a bit childish I think. While you might get some discount (just to shut you up) a more considered approach will probably yield a better result wihtout completely buggering your relationship at the bank.

When banks are assessing your interest rate they don’t just think about the margin they’ll earn, there’s more to it than that. Basically it comes down to risk and the upshot here is that the better the financial risk you are, the better the rate you’ll get.

In other words if you want to get a better rate from the bank try talking to them in terms of the risk you (don’t) pose to them. Argue the case as to why you’re a decent bet, maybe even a better bet than some of its other customers. It’s tempting to think the bank ‘owes you’ because you’re shelling out a lot in mortgage repayments but don’t lose sight of the fact that they’ve probably got a few hundred grand on the line themselves.

So think about things like:

Is your loan under 80% of your property value? The lower the better.

What about income – is it from a stable and reliable source? Do you have a strong surplus after paying your living costs, mortgage etc?

What about your track record of mortgage payments and payments on other loans?

These are all questions that help demonstrate your riskiness or lack thereof. It’s an approach that we use and we know it tends to yield better results than rocking up and threatening to leave.

Your retirement plans are well advanced with money sitting in various investments or your rental properties are now starting to produce income after years of mortgage payments. You’re feeling quietly confident that you can retire in relative comfort in 5 years if you choose. You’ve worked hard all these years, raised a family and so on and a comfortable retirement is certainly well earned.

Now imagine your 35 year old daughter, a single mother of 2 comes to you to say she’s been diagnosed with breast cancer. After getting over the shock you discover she doesn’t have any Trauma cover. Or income protection. And she forgot to renew her medical insurance.

Most baby boomers would think nothing of helping their children in such a situation. Even if it meant irreparable damage to their retirement savings plans that were about to bear real fruit. But wouldn’t it be nice if it didn’t have to get to that stage?

Baby boomers! You have an opportunity to protect yourself and your children’s financial position by opening the conversation about insurance with them. Suggest they speak to us about covering their mortgages and providing for their children. Just like you did.

Good question.

Clearly a bank is concerned about income when assessing a loan application. But the bank is really concerned about reliability and consistency of income. And this makes sense because the loan is going to last 20+ years and also requires payment every month. That’s why someone on a good salary looks better to a bank than someone who’s recently decided to ‘go out on their own’.

By its very nature, contracting scores fewer points in terms of reliability and consistency when compared to regular wages or salary so the trick is demonstrating you have a track record. Show that you are able to pick up a new contract when the previous one comes to a close.

Failing that, you better have a decent deposit to give the bank a bigger margin to rely on if things go pear shaped and you find yourself without another contract to roll into. Still even that’s no guarantee of getting the bank to say yes upfront.

The upshot is this – if you’re thinking of buying a house but also of changing from a salaried position to going self employed, onto commission or contracting then I’d say buy the house first.

The fact of the matter is that if we look back over recent months we’ve seen sales activity in Auckland on a definite increase. There were 51% more sales in February than in January; in March they were up another 19% on that. I don’t have the actual figures for April but my phone seems to have been ringing pretty hard so I expect the numbers will be on par with Feb/Mar. What we know for sure is that prices tend to follow sales activity – more sales means prices go up. One real estate agent I spoke to commented that Auckland real estate is booming with a capital B which I thought was a bit unhelpful really. Yet another who I regard as being a bit more level-headed pointed to a shortage of stock and low interest rates as causing a gentle but very definite lift in prices. But if there’s a potential shortage of houses on the market maybe prices won’t keep lifting…

Who’s right? Both.

In reality the Auckland property market is actually a bunch of smaller markets and each can and does behave a little differently. And this makes sense when you think about it – the areas that tend to show consistently good price growth have features like good school zoning, views or proximity to the city. Meadowbank and Mt Eden are a classic examples of that, especially the latter where school zoning is ‘the’ issue. That’s not to say the so called ‘less desirable’ areas won’t show good growth as well – they are the stepping stones for first and second home buyers and prices react more acutely to other factors such as what it costs to rent versus paying a mortgage. Glenfield or Mangere are examples in that category.

And if I go back to my two real estate agents above I can tell you that both operate in different parts of the Auckland area. That’s why their view of things is different. That’s why they’re both right.

First Home Buyers. If you were panicking and thinking that you might miss out (and we know some of you have been in panic mode) – fear not. We know from experience that the deal of the century comes along about once a month if you’re actively looking and keeping your ears and eyes peeled. Seriously, they come along that often and always have. Our rusty old crystal ball suggests interest rates will remain in your favour till Christmas but beyond that it’s a bit fuzzy. The main thing I would say is just make sure you’ve come to us to get finance pre approved and have a team of people you can tap (this team consists of lawyer, property valuer, and property inspector) so when ‘the’ property comes along you can jump on it before anyone else does.

CH

A few weeks ago we workshopped a case with National Bank where the business owner was looking for a loan to ‘tidy up a few bills’ and to fund a little expansion plan she had in mind but the bank weren’t so keen. It was hard to understand because the business was able to show a nice upward trend in sales and profitability over the last few years. That’s a pretty good story against the backdrop of an economic recession.

But digging a little deeper into the financial accounts highlighted some issues which made the bank less enthusiastic

• stock levels had doubled and so had the length of time it took to sell her goods
• the time taken to pay her suppliers had doubled and it was taking longer for her to collect invoices she was owed as well
• Solvency was getting worse

From a bank’s perspective a worthy borrower is not only profitable but also has sufficient cash flow to pay its bills on time (one of which and usually the biggest will be a mortgage to the bank). In this example the bank can see plenty of profit but poor cash flow and throwing money into expansion and to pay suppliers wouldn’t really do anything to solve that problem. In fact by increasing expenses it could make the problem even worse! Why would a bank support that?

In this case the bank did actually come to the party. But how?

Basically the owners initial proposal had missed the mark by talking about how the business would generate increased profit and how wonderful that would be. But it failed to talk about the cash flow problem and how that was going to be addressed.

The new proposal included using a daily deal site to move the excess stock and get some cash in the door. A system was set up to give a discount against future purchases for customers who paid within a short timeframe. A payment plan was worked out with the two large customers who were taking longer to pay. And in conjunction with the accountant some realistic numbers to support the plan were put together. It worked.

Lessons learned?

Keep an eye on your accounts and get a good book keeping system like Xero so you can punch out regular reports and monitor this stuff.

A bank is a bill and like you, it wants to be paid on time. Remember profit is nice but cash pays bills.

Banks do actually understand business pretty well and do support self-employed people.  But they have very little time for owners who don’t understand their own business.

Resist the DIY approach to lending and get a broker to help you. A good broker will address any issues and tailor your application to suit.

However thats not the full story, as its only on TV hospital dramas where seriously unwell patients are suddenly cured and walk out of hospital within a week. The reality is that treatments such as chemotherapy may well save your life, but may also cause “collateral” damage. These amazing drugs that can kill cancer cells also kill other fast dividing cells like the lining of your stomach and your skin. And then your liver and kidneys have to cope with the toxins they leave behind. These treatments generally last for months and their side effects can last for months.

It is more important than ever to not just have simple life insurance. But to also have disability cover that will help you cope financially if you are seriously ill. Chances are that you will survive, but your recovery will probably take time.  Thanks to ACC you have great cover in the event of accident (if you are earning). By contrast the maximum sickness benefit for an individual is just $205 per week. Not much to live on!

David

With interest rates at current levels it’s got a lot of people wondering whether they should be seriously looking at paying off their own mortgage instead of their landlord’s. I seem to be having this conversation on a weekly basis with potential clients and if you ask me plenty of them should.

The average rent on a three bedroom house in the above mentioned central Auckland suburbs is around the $600 per week mark and that kind of money pays a $425,000 mortgage. But that won’t buy very much in those same suburbs so most likely you’ll have to move a bit further out. For some being more than a 15 minute cab ride from the action is a bit too much to take. But I say you’ve got the choice of shelling out your hard earned cash to a landlord in the form of rent or to yourself in the form of a mortgage. It’s the same amount either way (roughly) so you might as well get something back for it, right?

The real problem most people face is saving up a deposit that’s large enough.

The good news these days is that banks will lend 95% of the purchase price to suitable applicants which means our central city dweller need ‘only’ save $25,000 and they’re into a $450,000 house (a bit further out). If you’ve been into Kiwisaver a few years you’re probably halfway there (think first home withdrawal) so the task of saving won’t actually be as tough as you first thought.

There’s a few tricks to this though – it has to be done right – and most people would be well advised to see a mortgage broker before going too far to make sure they hit the bank’s lending criteria easily when the time comes. In fact chapter one of Cam’s book ‘The bank said yes!’ tells you all about it. Look out for your chance to download a free copy real soon.

A recent NZ Herald article highlighted the fact that Westpac and ANZ have differing views going forward. ANZ’s Chief Economist foresees major risks for the NZ economy and so suggests you remain floating to see if rates fall further. But the Westpac Chief Economist thinks fixed rates are now so attractive that you should fix. He believes that it is risky to wait, as in the near future there may be a rush to fix which could drive up rates sharply, something that has happened before.

And which side of the fence are we on? Depends on what your situation is.

No that’s not me trying to dodge the question! To give you a real answer it’s best to understand your specific circumstances because the reality is some people should fix, some shouldn’t, others should do a bit of both.

David

I noted a couple of things.

Firstly, that first home buyers are active in every region across the country. Which would seem to match very closely what we’re seeing too. After all, they’re the kind of client we most often assist.

Secondly, that prices are perceived to be rising. Whether or not that’s really happening is almost irrelevant – perception is reality. Having said that we’ve had several clients just recently really pushing the boat out to ensure they’re putting their best foot forward in order to buy a property so if prices are rising I’m not surprised. Especially in Auckland which always leads the way in terms of property price rises.

Thirdly, that the main reasons for sales failing to complete is because finance cannot be obtained or because building inspections reveal problems. No doubt the two are related but I still have a niggly feeling that some people are going into a buying situation without a pre-approval. God knows why you’d put yourself through the heartache but it still happens.

It seems some lessons are worth repeating:

The starting point for any home buyer is to get your pre-approval sorted. That’s true even if you have tons of equity built up over the years because lending criteria can and does change. What might have seemed all too easy 5 years ago may not be the walk in the park you remember. The GFC changed all that. Understand what you can and can’t do (financially) and you’ll be in a great position to be decisive and act quickly. Both great attributes when negotiating a house purchase whether it’s your first or fifth time.

The leaky building crisis still casts a pall over the property market and wise buyers will take the precaution of getting a building inspection done so as to avoid buying a lemon. Even if the house appears to be in perfect nick I’d still say you get one. Why? Mostly because they always reveal something that needs repair and you can use that to your advantage in terms of squeezing a lower price out of the vendor. If spending $500 on a report ends up saving you $10,000 it’s money well spent I say. If it reveals a house in perfect nick so much the better. The main thing is you didn’t end up buying a problem. Then it really is money well spent.

K. But where to start…..?

Should you look into a Welcome Home Loan?

This is a decent scheme that allows you to buy with a very small deposit, maybe even no deposit within certain limits. My feeling for most people who want to buy a house in Auckland is that the scheme is of little use because property prices are a bit too high. If you’re an Auckland buyer and you fit the scheme criteria there’s a damn good chance you fit the standard 95% bank criteria too. So what’s the point. In other cities and towns maybe…

Get a deposit

Whether you fit the 100% loan criteria via Welcome Home Loans or not my advice would still be to see if you can save a deposit anyway, especially if you are in no hurry to buy. Having some kind of deposit makes your mortgage balance and loan repayments easier to swallow. Sure, the difference is small but for some people that difference is enough to make things work. And if you’ve been saving hard out you’ll be used to the kind of commitment paying a mortgage requires. Saving a deposit is good practice for paying a mortgage.

So, how much deposit?

The standard response is to get a 5% deposit, maybe more if you can. Ok. That sounds fine. But just how much is a 5% deposit? How much do I need to aim for. $20,000. $30,000. $50,000. Or what? Good question.

The answer really lies in knowing how much loan your income will buy. For instance some people’s income may let them borrow $1M of which 5% is $50,000. Clearly you don’t have to go out and buy a million dollar home straight away because although you might be able to afford it that size loan might just kill you! Other people’s income might allow a more modest loan of $200,000 in which case 5% is $10,000. But you don’t get much for that in Auckland, maybe half a cardboard box.

So how do you figure out what you can borrow and in turn what the 5% deposit will be?

Gross income x 4.5 is a rough rule of thumb. Or you could add up your rent plus savings and go to a bank calculator to see how much loan you could get for that level of monthly or fortnightly repayment. Still, both are only guestimates.

But most people really want an accurate figure so they’ve got a specific target. Knowing this will also help you figure out what kind of house you can realistically look at once your deposit is in place. So, speak to someone who does this kind of calculation every day. Like us.

For most people the minimum deposit target for a house is…?

In our experience it’s around $20,000 as most of our clients are first home buyers looking in Waitakere, North Shore or Hibiscus Coast where your typical first home is in the $350,000 to $450,000 price range.

Then what?

Once you know the target figure you can then set up your budget to make it happen. You’ll know how many pay days it’ll take and the funny thing is that family are often willing to help build your deposit as well especially if they can see you’ve got a little bit serious by talking to a broker and doing a budget. Doing these two things helps eliminate the fear they have that you’ll blow the money they give you on a trip to the Melbourne Cup or whatever.

Kiwisaver plays a part

Yes it does. And for a lot of people Kiwisaver is becoming ‘the’ way to save for a house as well as retirement. There’s a lot to like about the scheme as it applies to first home buyers mainly because you can withdraw the money you put in as well as the money your employer puts into the scheme. In other words your employer is helping you save for a house! Free money! Yeeehaaa! Don’t forget the first home buyer subsidy as well which adds at least $3000 per person. And couples can double up if both of you use your Kiwisaver benefits.

Geez, I wish Kiwisaver was around when I bought my first house! Still it was pretty straightforward, we just did a budget and slotted money into a savings account each payday. It took us 6 months to get to our target figure and we were in a house 6 months later. It was a piece of cake in the end.