David Paulin is an Authorised Financial Adviser with more than 30 years’ experience. He is currently offering free consultations on mortgages or insurance. Please click here if you’d like to arrange to speak with David.

Everyone wants to know: is now a good time to buy? Or are interest rates going to go lower? But what I don’t hear very often is what people are trying to achieve.

Advising someone who is 30 and on a good salary is very different to advising someone who is 50, owns three high-leveraged rentals, and wants to know if they should buy another property.

 

30 versus 50

 

So, let’s start with the 30-year-old. They have a steady job, and they earn a reasonable income. They just want to get on to the housing ladder.

They are looking at home ownership from an emotional point of view. They expect to be in a house for the next 30+ years. From one day to the next, they won’t know what the value of their house is. Frankly, most people don’t really care. All they are interested in is making the monthly payments, and in some cases, how quickly they can pay off the loan.

But this is a very different situation for the 50-year-old. They want to know if they should add to their rental portfolio. The timescale may only be 5-10 years. It usually isn’t an emotional buy, but one that’s based on numbers.

 

Capital growth in the long-run

 

A large mortgage is unlikely to be repaid over 10 years. So the call is this: will there be capital gains?

Now, I can’t answer this specifically. But if I go through the figures of demand and supply, what the banks are offering, migration, price relative to people’s incomes, government legislation, tax changes, etc — I can make a reasonable stab. But, at the end of the day, it is down to the individual and what they want. Not what I think. If their beliefs line up with mine, they may buy. Otherwise they will probably not.

So, is property going to be worth more in 10 years? And will the growth outstrip other investments such as the stock market? Do people ask this question?

The main feedback I get is this: ‘My family was crippled in the 1987 crash. So I don’t trust the stock market. I just want something I can see and drive past.’

What I don’t tend to hear is this: ‘Many of my friends have a rental property and have made money. So I think I will buy, no matter what.’

 

Research before you buy

 

I feel the days of easy money are behind us. Much more research needs to be done before you buy — such as running all the numbers through an Excel spreadsheet.

These numbers should account for recent government legislation and tax changes. You should also make a plan if your tenant ups and leaves, if interest rates go up, if tax law changes, etc.

My take on it is this:

  • If you are in your 30s, have a steady income, and want a home for your family at a figure you can afford, then go ahead and buy.
  • If you are an investor in your 50s, my advice is slightly different: do not buy a property at the retail price unless you have a very good reason for doing so. For example, you believe the asking price is wrong and is too low.

I think the days of buying below market and adding value are back again. Price gains, if we are lucky to get any, should not be banked on.

It’s worth looking at your finances from a mortgage point of view, too, in terms of how much you can afford. You may find it beneficial to take a look at a mortgage income calculator so that you can truly assess how much you’re able to afford on a property.

 

How much deposit is needed to get a mortgage?

 

I am starting to hear this more and more as the children of baby boomers move into home ownership. Parents want to know if they can help with the deposit.

What I would say to the young adults is this…

  • Keep personal debt to a minimum — under $8,000.
  • Pay off any credit cards.
  • Keep bank statements in the black.
  • Pay back student debt if you can afford to do so.
  • Contribute to KiwiSaver, especially if your employer matches your contributions.

The parents just want to know if they are needing to lend $25,000/$50,000 or more.

  • To answer this question, let’s take a property in Auckland.
  • It’s worth $650,000-$800,000 in value.
  • The bank is prepared to lend 90%.
  • The children’s KiwiSaver is $30,000.

The deposit assistance from the bank of Mum and Dad will therefore be somewhere in the region of $35,000-$50,000. Maybe more if the bank will only lend to 80%, as the income may not qualify for a 90% mortgage.

 

Should I take out life or mortgage protection insurance?

 

I don’t get asked this question much. Let’s face it: not many people wish to pay for something they can’t see and may never use. However, I believe it is prudent, especially if you have a large mortgage, to cover the main income earner.

Without this income, even only for a few weeks, the household may become financially stressed. This is something none of us want.

The COVID-19 pandemic has shown us that very few people have a buffer ready for a rainy day. If you can’t build a buffer up to cover six months of living expenses, then you should take out insurance.

After all, you probably have house and car insurance. They both consume money.

So think about it: you are the income earner and wealth creator. Your well-being is precious. Surely, you’re worth insuring much more than your car!

 

Regards,

David Paulin

Contributor, Wealth Morning

David Paulin is an Authorised Financial Adviser with more than 30 years’ experience. He is currently offering free consultations on mortgages or insurance. Please click here if you’d like to arrange to speak with David.