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Professional advice helps fix better rates

Professional advice- Suresh Sharma.jpgIn his monetary policy review on June 10, Reserve Bank Governor Dr Alan Bollard raised the Official Cash Rate (OCR) to 2.75%, after maintaining the rate at 2.5% for about 13 months.

Dr Bollard had kept the OCR low in response to New Zealand’s worst recession in almost 20 years. The recession led to a credit crunch that saw international funding lines dry up, affecting businesses and households alike.

Dr Bollard was not open about future rate hikes. He said, “Further removal of stimulus will be reviewed in light of economic and financial market developments.”

Banks will pass on the entire rate increase of 0.25% in their floating interest rates on mortgages. Short-term borrowing costs of banks will continue to be lower compared to long term borrowing costs, the latter being determined by international funding costs.

Short-term mortgage rates will therefore continue to remain better than long-term rates for some time.

In his earlier review, Dr Bollard had mentioned that OCR hike will not go as far as it did in early 2008. With 30% of mortgages being on floating and almost 30% on short terms, the Reserve Bank is in a better position now to control mortgage costs and in turn housing market with OCR, which is a more potent weapon.

When interest rates move up with the OCR, many homeowners would impulsively opt for long-term fixed rates. Floating rates continue to be the cheapest, while short-term rates are better than long-term rates. I believe there is no reason for homeowners not to take the benefit of low interest rates.

But you may like some certainty in your repayments. A medium option can be to break your mortgage into two or three parts on floating, one year and/or 18 months. This gives you the option for higher voluntary repayments as well. It is prudent and important to repay your mortgage loan as fast as possible, since you can save substantially on your interest cost.

While processing home loan applications, we come across people whose substantial income goes to pay high interest rate personal loans, hire purchases and credit card debts. A prudent person (particularly of Indian origin) saves first and spends later.

Subdued Housing Market

Auckland’s residential market has remained almost flat from February 10.

Budget 2010 is yet to have any noticeable impact, and may take months to show through, according to the latest QV Valuations Report.

Some suburbs however experience healthy demand and properties are fetching good prices. The North Shore and Central Auckland markets are performing well, with prices showing upward movement.

Homes for youngsters

Many people, especially young first homebuyers would find it had to meet the general requirement of 10% to 20% of deposit for home loans.

Parents and family members can provide a guarantee for deposit amount with supporting security (generally first mortgage over residential property), without providing cash up front. These guarantees can be limited to the amount of the deposit.

The guarantee would be cancelled automatically as the loan amount is reduced by 20% repayments.

Banks expect the guarantor also as their customer and would require an application from both the borrower and guarantor for assessment.

Talk to us if you need more information and advice on this option.

Suresh Sharma is Director of Cherry Mortgage Solutions based in Auckland. His personal disclosure statement is available on request.

Disclaimer: The above article should be taken only as a guideline and not as personal advice. Mr Sharma and the management and staff of Indian Newslink absolve themselves of all responsibilities or liabilities in this connection. He can be contacted on 021-827575. Email: cherrymortgage@xtra.co.nz

Website: www.cherrymortgage.co.nz

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