December 2014

Christmas Wishes From My Family To Yours

As Christmas is approaching, I just wanted to take the time out to wish you and your family a Merry Christmas. I hope you have the opportunity to relax and refresh - I’m certainly looking forward to spending time with my family and taking some time out!

We’ll be closed from 19th December – 12th January 2015. However, I will be available for any urgent requests over that time, should you need me!

Market Update:

The OCR was kept on hold today at 3.5%, and the expectation is for it to remain at this level well into 2015

Statement issued by Reserve Bank Governor Graeme Wheeler:

“The Reserve Bank today left the Official Cash Rate unchanged at 3.5%.

The global economy continues to grow at a moderate pace, though recent data suggest a softening in major economies other than the United States. Inflation remains below target in most of the advanced economies due to spare capacity and declining commodity prices. Monetary policy is expected to remain very supportive for some time.

New Zealand’s economic growth is running at an annual rate of around 3.5%. While dairy prices have declined sharply, domestic demand has retained momentum, supported by the on-going growth in consumption and construction activity. Interest rates are low by historical standards and continue to support domestic demand. The exchange rate does not reflect the decline in export prices this year and remains unjustifiably and unsustainably high. We expect to see a further significant depreciation.

CPI inflation remains modest, at 1%, in the year to September. Weak global inflation, falls in international oil prices and the higher exchange rate are the main influences. Inflation in the non-tradeables sector remains subdued with capacity pressures having less impact than usual.

Growth is expected to remain at or above trend through 2016, with unemployment continuing to decline. Modest inflation pressures suggest the expansion can be sustained for longer than previously expected with a more gradual increase in interest rates. Underpinning this, the economy’s productive capacity is being boosted by higher labour force participation, strong net immigration and continued investment growth.

Risks to the growth outlook include dairy prices, which are expected to recover in 2015, the overvalued exchange rate, and the strength of construction activity. Inflation risks include the impact of rising capacity pressures on domestic inflation, the response of house prices to the strong migration inflows, and the impact of lower oil prices.

With output projected to grow at or above capacity, CPI inflation is expected to approach the 2%, midpoint of the Reserve Bank’s target range in the latter part of the forecast period. Some further increase in the OCR is expected to be required at a later stage. Further policy adjustments will depend on data emerging over the assessment period.”

Need money to fund a build project?

First off, let me explain that there are two types of lenders. Most of the major banks are income-based lenders, which means they focus on whether the client can repay the debt based on income earned. The other type are security lenders, and they look at any assets that they can take security over.

If you want to fund a build project but don’t have much cash, then you’ll probably want an asset lender. Asset lenders base their decisions on the amount of equity you have available in your property and your actual plan to repay the debt. Generally their interest rates are quite a bit higher and currently you would pay between 9 – 12%, in interest. Asset lenders also charge application fees and you need to cover all their professional fees.

It may sound to you like an asset lender isn’t a great option, but it absolutely can be if there’s enough profit in your project. Let me explain how with this example:

Imagine you’ve got a unencumbered property that you can subdivide, build another house on, and then sell for a nice profit. After talking to a traditional bank, they determine that you don’t earn enough income to qualify for a loan. An asset lender would review the whole project to determine whether you have enough equity, and if you have a clear exit plan should things go awry (i.e., how will you repay the debt within a limited timeframe?) If you’re able to do the project within two years and make a profit, then they could fund the whole project including your interest cost.

Property: Subdivide and build a fee simple new build home

Purchased for: $0 (Client owned the land)

2nd Tier finance Loan to cover build & all other PC sums: $750 000

2nd Tier and broker fees: $22,500

Estimated Interest cost over 6 months: $42 000

Sale price: $925 000

Profit after fees and renovation costs: $110,500

If you have any questions around this then just give me a call and I can explain it in more detail. I help a lot of small developers who use this type of finance wisely.

If I were a borrower, what would I do?

A number of banks have unexpectedly lowered their interest rates over the last two months, so you can now obtain a 4yr and 5yr fixed rate at very close to 6%. That’s pretty good news for borrowers, and if it were up to me then I’d lock in some of my funds at those rates. To spread the risk, I’d also keep some funds on shorter term rates.

At the moment, anyone who is predicting rates more than 6-12 months out is more than a little adventurous! Thus I reckon it’s safer to lock in some funds at a fixed rate, knowing that I’ll only have to pay reasonably low rates.

Corrie, Nick Torjussen, myself and the team at Highland Park wish you a Merry Christmas and Blessed New Year!