The mortgage and property conundrum

iStock 000005678412Medium(copy)(copy)(copy)(copy)Mortgage interest rates are at historical lows so for many of us, it is decision time. For those with a mortgage, the common questions we are getting relate to:
  • Do we fix or float?
  • We do break our fixed mortgage now so we can obtain lower interest rates?
  • Which bank has the best deal for us?
  • Do we pay off our mortgage faster now that interest rates are so low?
For those without a mortgage, the common questions seem to revolve around:
  • Do we assist our kids into a home while interest rates are so low?
  • Do we buy a rental property now, later or not at all?
None of these questions are simple or straightforward. Each answer is dependent on your financial goals, your personal risk profile, your view of where your local property market is at in the property cycle and a multitude of economic factors. Within the Milestone Group, we have a team of experienced property and mortgage advisers who are able to work through all these issues with you and provide specific advice related to your unique situation.

Some home truths that are often overlooked by many property investors:
  • Auckland house prices will not keep rising for ever. They will need to have a correction some time - it is just a matter of when and how big will the correction be
  • The ‘Auckland effect’ is real. Property values in desirable locations outside of Auckland will rise as some in Auckland exit in search of lower priced homes. However, all locations are not going to benefit from this effect. It is important to identify what will be the beneficial locations.
  • Once retired, you cannot live off capital gain. Eventually, a low yielding property will need to be sold and the proceeds placed into a more diversified investment portfolio to provide your retirement income needs.
  • There is an optimal level of debt that a rental property should have. Paying off the debt on a low yielding property will actually decrease your return on capital. It pays to know how to calculate this return so you do not lull yourself into a false sense of security.
  • Do not bank on the current investment tax benefits being there forever. Instead, regard them as currently being the ‘icing on the cake’ as tax rules will inevitably change.
  • Take a realistic approach to calculating the true cost of owning a rental property. This includes buying and selling costs; rates, insurance and long term maintenance costs; your own time; possible property manager costs; legal and accounting costs; the lost opportunity cost of possibly using the capital elsewhere; plus the general hassle factor. These may all be manageable whilst one is young, but they often become a burden in later life.
  • High yielding residential rental properties generally have low capital gain and are in areas with higher average vacancy rates than a location like Auckland.
We are here to help you work through all issues relating to property and help create a diversified investment portfolio to meet your needs. Give us a call.