Scorching hot weather and hot rates to match – we are definitely in a buyers’ market right now. While the housing market typically goes quiet between Christmas and Waitangi Day, here at SuperCity we’ve still been really busy with new buys, renovations and refinances.
In December first home buyers made up the highest-ever proportion of lendingacross the country and I’ve loved helping some of my clients buy their first homes; it’s one of the most satisfying parts of this job.
There’s a lot of newsbeing forecast about the Auckland housing market – However, I think we’re going to see a repeat of last year as far as prices are concerned. There’s nothing wrong with a flat period after a long run of growth (it’s much better than a big decline!) and it’s allowing more people to get into the market, which is a good result. For everyone who already owns a home, we all know it’s about ‘time in the market, not timing the market’, right?
Right now, rates are still near record lows with cash backs from banks going strong. So if you’re entertaining thoughts of getting onto the housing ladder, upgrading the family home or buying an investment property, it’s a fantastic time to be talking.
Pay off the mortgage? Maybe not.
It’s a great feeling to have your mortgage paid off, but should it be your priority? Maybe not. Traditionally your basic financial plan has been:
Buy a house,
Pay it off,
Then downsize at retirement and live off the excess cash.
I’d say that’s still a solid plan and if you’re on that track, you’re probably doing better than most Aucklanders. (And if you’re a recent homeowner, paying down your mortgage is vital because it grows your equity.)
However, you might want to push yourself to higher financial goals, and if that’s the case, focusing on getting rid of a home loan might be less important. Instead, you can use the equity in your home to buy investment properties. That strategy can result in greater wealth overall as the value of your investments grows alongside the value of your home.
Done right, you should end up with more debt and more wealth. This approach won’t suit everyone – there’s an element of risk and stress involved compared to simply reducing your loans methodically. However, the rewards can be impressive, and the rental properties should eventually pay off your home loan as they grow in value.
Some of my investor clients started out with big loans on their homes and three or four rentals. Instead of owning one debt-free $1.5 million home, they reached age 65 with, say, $800,000 in debt against $4 million worth of property. They can easily clear that debt by selling one house. That’s a net worth of $3.2 million, rather than $1.5 million – and the remaining rentals are also producing an ongoing income.
Want to know how much equity you might be able to access? Or how much it might cost to buy a rental? Give me a call or drop me a note, I’m happy to talk.
Capital Gains Tax – Don’t panic just yet.
There’s been a whole lot of fear-mongering recently about the likely introduction of a capitals gain tax. I can certainly see why people are concerned. Recently, though, we’ve been talking to accountants and tax experts about how this is likely to play out, and what we’re hearing is reassuring.
We’re told that that the capital gains tax is almost certainly not going to be applied at the marginal tax rate – if that happened, New Zealand would be a major outlier compared to similar countries’ tax policies. Also, apparently it would be extremely complex to apply it to every property, so the most likely scenario is ‘grandfathering’, where properties purchased before CGT comes into effect will be exempt. And as usual, any changes will be flagged well in advance, so we all have time to sort ourselves out before anything drastic happens.
This year we’ll probably see ring-fencing rules introduced for property investors. These will prevent the losses on negatively geared properties being offset against your personal income. For most of our clients that’s not going to be a major problem and of course, one rental can still off-set another rental.
If you think you’re likely to be impacted by ring-fencing, you may be able to restructure your properties – talk to an accountant who understands property investment and then give me a call. I would be happy to introduce you to an accountant if you do not yet have one or if would like a second opinion.
Should I Fix or Float my Insurance rate?
Got your attention? Good, it’s important to know this because it can save you tens of thousands long term and enable you to keep your cover affordable and sustainable.
Stepped vs Fixed rate – what is it?
A common problem we come across when meeting new clients is that they’re typically frustrated with the increasing costs of their insurances each year and worried if they can afford to continue to keep it. Clients love it when we share our advice with them on how they can choose to structure their rates and most fix their rate once they see how much they’ll save long term.
Stepped rate premium – the rate increases each year with age (and age always goes up) – Imagine you have a floating rate on your mortgage, and every year you have a birthday your floating interest rate goes up. Most clients we come across have their insurances structured this way because they haven’t had advice on their options.
Fixed (Level) rate premium – the rate is fixed at your age now and stays the same – Ok, now imagine being able to fix your mortgage at the lowest rate, and not just for a short 1 – 5 year period but for as long as you need it. For example: I’m 37 years old and fixed my insurance rate at age 31. So, from age 31 all the way to age 70, I’m only ever paying my insurance as a 31 year old. This enables me to keep my cover affordable and sustainable long term – and I’m saving tens of thousands along the way.
Ok, what’s the catch?
The catch is, just like when choosing to fix or float your mortgage loan, the fixed rate generally starts higher whilst the floating rate looks “cheap”. However, it’s only cheap short term. With insurance, the fact is it WILL increase every year, whilst the fixed rate won’t.
Client story: Rebecca & James* (a couple in their early 30s with a $750,000 mortgage and a $750,000 Life cover policy to cover the debt on death of a spouse):
Our clients referred their friends, Rebecca & James to us because they were frustrated their Life cover stepped rate premiums were increasing each year. We calculated their Life cover premium had increased by 127% in only 7 years! We then showed them options like the following:
Rebecca – By age 70, $750,000 Life cover would cost you $1,017.38 monthly (due to a Stepped rate structure because of annual age related increases). Alternatively, you can fix the rate to age 70 for $74.06 (saving you over $72,806)
James – By age 70, $750,000 Life cover would cost you $1,545.80 monthly (due to a Stepped rate structure because of annual age related increases). Alternatively, you can fix the rate to age 70 for $105.66 (saving you over $99,285)
Rebecca & James fixed their Life cover rate (which means the rate stays the same) giving themselves peace of mind they can afford to keep it as long as they need – and they’re over the moon they’ll save over $170,000 in accumulated premiums simply by fixing!
Have you noticed your rates increasing each year? Know family, friends or colleagues with the same problem? If you would like a review, simply connect with us on email or phone and we’ll go from there.