Inflation Interest Rates Recession – The 2022 Wrap Up

2022 Wrapped Up

2022 is drawing to a close. Will the year finish on a high?

Inflation, interest rates, property prices, and a potential recession are all playing on everyone’s minds.

So, what are we dealing with?

Let’s look into all these aspects in a bit more detail so that you can have peace of mind heading into Christmas.

Interest Rates Are Up… Again

On 23rd November, the Reserve Bank announced that they have raised the OCR again in a bid to control inflation. The cash rate has now lifted to 4.25% from the previous rate of 3.5%.

While the Reserve Bank feels the rise is necessary, “an expert says it’s the biggest increase since the OCR was introduced in 1999 – and there is still a real chance New Zealand could fall into a recession.” [source]

So, what does it mean for you?

“It’s certainly clear that interest rates are much, much higher than they were a year ago or eighteen months ago.

And that hasn’t been entirely expected by everyone so, it is a bit of a shock and as we’ve heard, people are struggling with the cost of living so it’s a bit counter-intuitive to pile another greater cost of living on to people.

But the fact is, the only way to get on top of inflation is to actually cool spending down.” [source]

There is some good news though. If you have savings in the bank, deposit rates are going up. So, you could see a positive impact on your savings. [source]

What Do Higher Mortgage Rates Mean?

Every month, we hear talk of mortgage rates rising, and this month is no different. But what does it mean in practical dollar terms for the average New Zealander?

Well, “ASB senior economist Mark Smith said the average rise in household debt servicing costs would be $80 per week by the end of next year and $100 by the end of 2024.” [source]

Of course, it is all dependent on the level of debt that you have. The average mortgage for a first home buyer is currently sitting around $600,000.

And those that have a significant amount of debt will obviously feel the effects of the interest rate rises more heavily.

“RBNZ figures show a person could have fixed a loan for two years at the end of 2020 at 2.59%.

When it is refixed at the end of this year, that person will pay an equivalent rate close to 6.75%. On a mortgage of $500,000, those payments would be an extra $300 per week.” [source]

The best solution is to chat with an experienced mortgage broker if your fixed term mortgage is coming up for renewal.

We can provide advice on the best structure for your individual needs and secure the best rates possible.

More Kiwis Are in Debt

It’s no secret that inflation has been rising, and as a result, we are paying more for the same goods and services than we were a year ago.

This has a knock-on effect, making it harder for some families to meet the repayment costs. There has also been a higher level of borrowing.

The number of New Zealanders who are behind on their repayments is up by 5% compared to October last year, payments are overdue on 15,200 mortgages, personal loans are up by 18.1% and vehicle loans are up by 17.3%.

And, as a sign of the times, mortgage lending is down by 36%. [source]

We aren’t out of the woods yet, as it is unclear what the financial future holds for everyday New Zealanders.

So, if you are feeling the pinch, our best advice is to have a chat with a financial to see if there are better options for your current debt. We may be able to restructure your existing loans or consolidate for easier repayments.

House Sales Are Slow, But Still Happening

You might be thinking that house sales have ground to a halt with the ever-increasing mortgage rates and rising inflation.

But that isn’t the case! Houses are definitely still selling.

Barfoot & Thompson reported selling 700 properties in November, which was up from 627 in October.

While down 41% from the 1182 that were sold last November, it is still the highest monthly number of homes sold in the last six months. [source]

“Property is selling, albeit at a level lower than at the same time last year. What it demonstrates is vendors and buyers are reaching an agreement as to where prices are at,” says Thompson. . [source]

The average sale price for the month of November was $1,153,795. It should be noted that this was influenced by a number of purchases in the $2 million and above price bracket, but also a number of first home buyers in the under $750,000 category [source].So, quite a spread across the market.

What does that mean for the average New Zealander?

Well as a buyer, there are plenty of properties to choose from, in fact, buyer choice has rarely been greater.

And as a seller, it is still possible to sell your home for a fair price. But, before doing anything, both sellers and buyers should chat with an experienced mortgage broker to check the financial viability of any property transaction.

Borrowing Capabilities

Borrowing money in the new year will be somewhat different. Property prices are falling and there is increased stock on the market, so competition between buyers may reduce.

Each bank has its own assessment criteria and there are significant variations between lenders, some as much as $300k up or down.

There are also a number of other things to consider:

Debt to income restrictions (this may impact the amount you can borrow)
LVR restrictions (causing issues for investors)
Rising interest rates (meaning your repayments will be more for the same borrowing)
Restrictions from the CCCFA
Rental income shading – with only 60% in play when it used to be 80%

Coupled with the uncertainty of the property market, rising inflation and the state of the global economy, borrowing is not going to be an easy process in the coming year.

Are We Facing a Recession?

Recently, we have been hearing whispers of the “R” word being mentioned… Recession. So, is one on the way and should we be prepared for it?

Word on the street is, not yet.

GDP figures are due from Stats NZ on Wednesday and the prediction is that there will be “lower yet significant quarterly growth”. They are expecting that growth to slow in 2023 and 2024, which could potentially bring the start of a recession.

“However, the consolation prize for that – lower interest rates – could still be some way off.

‘We think it will be mid-2023 before the Reserve Bank will be comfortable with where OCR settings are sitting to pause the tightening cycle, and mid-2024 before it is prepared to start bringing the OCR down,’ the ASB team wrote.” [source]

At this stage we are not in recession yet, but it is expected to arrive in the coming quarters, with high interest rates likely to stick around until that happens.

So, you want to make sure you are in the best financial position possible. If you have fixed mortgage terms coming up for renewal or you are starting to feel the financial squeeze, now is the time to chat, feel free to drop us a line today.

If you have questions about any of the ideas raised here or just want financial advice you can trust, get in touch with Oliver Broomfield Mortgage & Insurances today.

Frequently Asked Questions

Why use a mortgage broker?

The advantage of using a mortgage adviser is that they can negotiate with a number of lenders to find the deal that best suits you. They do all the leg work for you, saving you time.

Why don’t I just go to the Bank myself?

We help assess all your options, whereas the Bank is restricted by being only able to present one view.

Is it better to use a mortgage broker or a bank?

While banks expect the client will negotiate with them, or accept the given rate, mortgage brokers are more likely to go to bat for you, to get a lower interest rate.

Why choose Oliver Broomfield Mortgage & Insurances?

Our processes make financing your house purchase easy; providing quick personal service that takes the stress out of financing your home loan. With our wealth of experience in the finance industry, we know how to get the best deal for you.

Can I organise a mortgage without meeting in person?

Absolutely! We can still work with you using email, phone calls, and video calls. Whatever your financial situation is, we have a range of options to communicate with you whatever circumstances.

Can my application be done via the internet?

Yes, we have an online application system or a pdf form that can be completed. Supporting documents can either be uploaded directly into our system or emailed. We can use telephone, zoom, or email for further clarification or look at scenarios and receive and send information.

What is a home loan pre-approval?

A home loan pre-approval is a conditional approval confirming that we can lend you a certain amount of money, provided the property you purchase meets the lender’s home loan criteria. It’s a good idea to ask us for a home loan pre-approval before you start house hunting. It will help you determine how much you can borrow and to give you some bargaining power when negotiating a purchase price.

How much deposit do I need?

Saving a deposit is probably the biggest hurdle for most first home buyers. First home buyers need to have saved at least 5% deposit with 20% or more being the optimum. Remember that this can be made up from a KiwiSaver first home withdrawal and some first home buyers may also be eligible for a HomeStart Grant. Gifts and deed of debts from friends and family are also common.

Can I buy with less than a 20% deposit?

While there has been a lot of publicity about the need for home buyers to have a 20% deposit; there are still options available for you. We can talk you through what may be available to you including:

The ability to access low equity loans
Using your Kiwisaver contributions towards your deposit
Building your own home
Accessing parental assistance to increase your deposit.

Why does the size of my deposit matter?

The size of your deposit makes a big difference to the interest rate and the other costs you could potentially pay on your home loan. Generally, for lending where the deposit is less than 20%, the lender will also charge a Low Equity Fee (LEF) or Lenders Mortgage Insurance (LMI). Interest rates may also be higher for loans with a low deposit.

What do banks look for when applying for a mortgage?

Whilst assessing a loan application, banks will scrutinise your bank account (usually the most recent 3 months bank statements).

In particular, they are looking at how well (or not) you manage your account.

Do you have dishonors, and or unauthorised overdrafts?

The better your account conduct the better your chances!

The banks also want to make sure all expenses including fixed and discretionary costs are included in the mortgage application expenses.

How much can I borrow for a first home, rental property or build?

This will be determined by your income, your capacity to repay the loan, and the property type along with the current lending restrictions imposed by the reserve bank. Contact us today to find out.

How much do I need to earn to obtain a loan?

The income you will need to earn will depend on the size of the loan, the bigger your loan the more you will need to earn.

As a rule of thumb if you are a first home buyer who is currently renting and have also been able to save some money there is a good chance you will meet the banks’ income criteria.

What is LIM Report (Land Information Memorandum)

A LIM report is a summary of information that the local Counsel hold on a property. The report covers off information regarding consents, permits, code of compliance, potential erosion, subsidence, flooding of any type and the possible presence of hazardous substances. private and public stormwater and sewerage drain, rates, including any overdue rates.

Your solicitor should review this document.

Can I buy a second home or investment property?

Absolutely, we do this every day for many existing clients. We can use our scenario calculator to ensure you meet lender criteria and affordability for yourself.

I am an overseas resident. Can I borrow money in New Zealand?

Yes, you can borrow money in New Zealand and may be able to borrow up to 80-90% of the purchase price of a home.

Can I withdraw my Kiwisaver?

To be eligible to for the KiwiSaver First Home Withdrawal Scheme you must:

Be purchasing your first home;

Have been a member of KiwiSaver for a minimum of three years;
Have your KiwiSaver account with a KiwiSaver provider that allows saving withdrawals; and
Intend to live in the property for at least six months
We recommend that you contact your KiwiSaver provider and check their individual policy on withdrawals for first homes.
If you are eligible to withdraw money from your KiwiSaver, you may also be eligible for a first home deposit subsidy of up to $20,000.00 from Housing New Zealand – known as a HomeStart Grant.

What costs should I expect when buying a home?

Using a mortgage broker generally means no direct costs to you for their services but there are other unavoidable costs. These may include:

A Registered Valuation ($800 – $1,200)
Solicitor Costs ($800 – $1,500)
LIM report ($150 – $400)
Builder’s Report ($100 – $500)
Weather Tightness Report for Monoclad houses ($300 – $1,000)
Finance fee for non-bank lending (~1%)

Prices can vary. Always request a quote before ordering any of these services.

Is getting a mortgage complicated?

The banks all have different policies and risk tolerances. Buyers can get frustrated and waste a lot of time going to banks that won’t suit their needs.

Using a mortgage broker gives you a view of all the banks and their policies. It means you find the right bank faster and with less stress. With a mortgage broker, getting a mortgage isn’t complicated.

It’s about proving you have enough deposit and enough income and then heading to the right bank with that information.

Some tips to making your mortgage application easier: get your documentation sorted early and keep your spending as low as possible in the 3 months leading up to your application.

Do mortgage brokers obtain loans from the banks or lenders that pay them the most?

We will always act in the best interest of the client and will ensure that any deal we broker is the best we can do for the client.

While there can be variances in the amount different lenders pay us we do not favour any particular lender for this reason.

We are also members of NZFSG & Financial Advice New Zealand both of which have ethics that we must adhere to.

We can also be audited at any time by the FMA (Financial Markets Authority)

If the banks pay a commission is this then added on to the cost of our loan?

No… The lenders that use our services see us as an efficient channel to obtain business from. They only pay us on success i.e. when the loan settles.

We sit alongside their other channels such as a bank branch or mobile manager.

The cost of obtaining business from a mortgage broker is comparable to these other channels the banks choose to use.

For this reason, it will cost you no more to use our services.

What if I sell my home or refinance my mortgage shortly after using a mortgage broker?

Mortgage advisers (often called mortgage brokers) are paid by the bank when a mortgage is drawn down. If that mortgage is discharged (repaid and closed) within a short amount of time – typically 27 months – the broker must repay some or all of the commission (often referred to as a clawback). In this instance, the mortgage broker has essentially done the work for no pay.

We reserve the right to charge for our time if a clawback is incurred. The fee will be the estimated amount of hours the mortgage took at an hourly rate of $250 per hour. Unlike other fees, such as Break Fees from the bank, we have capped the amount we can charge clients at $2,500.

If you are refinancing or selling your house, the best thing to do is immediately talk to your adviser and discuss if any clawback fees will be charged.

Should I own the property in my own name, or a Trust or Company?

If the property is for you to live in, this is something you should discuss with your Lawyer at your initial meeting. If it will be an Investment Property, you should discuss with your Accountant. We would also suggest you find a property accountant, someone who deals in property all the time rather than just as a side part of their business.