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37 minute read
Refix your interest rate with confidence
What’s the best strategy now, and for how long should you re-fix? And learn more about Kāinga Ora First Home Partner co-ownership offering.
Andrea Rowlands
10 March 2023
Please Note: This newsletter was originally published on 10th March 2023. While the information presented here may still be valuable, some aspects may be outdated.
If you’re looking to buy your first home this year, conditions are more favourable than they have been for some time. And now there’s another helping hand available in the form of the Kāinga Ora First Home Partner scheme. In this newsletter we run you through what’s involved in this new co-ownership offering.
We also assess the landscape for those already on the property ladder, because 2023 will see many of you re-fixing your home loans as current fixed terms expire.
This will likely be a shock to the system (and wallet) with rates, and therefore repayment amounts, significantly higher than they were at the start of your term. It’s crucial to make the right choice when you re-fix as you’ll be locked into higher rates for a while.
What’s the best strategy now, and for how long should you re-fix? We look at some of the options you have to manage this new interest rates environment.
Kāinga Ora First Home Partner
As property prices fall across the country, lenders and real estate agents are reporting more first home buyers entering the market. CoreLogic data shows that a quarter of properties sold now are to first home buyers, which is a new record.
With investors still hamstrung by a 40% deposit requirement, it’s a great time to get on the property ladder if you can.
But what if you still have a shortfall between your deposit, the amount a bank will lend you, and the price of the home you want to buy? In a situation like this, Kāinga Ora’s new First Home Partner scheme could be an option.
Designed specifically for first home buyers, the scheme operates as a shared (or co) ownership model, with you as the majority homeowner and Kāinga Ora as a third-party shared owner of a property.
So how does it work?
Kāinga Ora will contribute a certain amount towards the price of your property (up to a maximum of 25% or $200,000 – whichever is lower), giving them an equivalent ownership share.
So, if you have a 5% deposit for the house you want to buy, and a bank is willing to lend you 75%, Kāinga Ora would fund the remaining 20% of the property price (giving them a 20% ownership stake).
You then agree to pay that 20% back to them until you’re the sole homeowner.
You’ll be responsible for any costs associated with the purchase, such as legal and conveyancing fees, and you’re also in charge of all the ongoing property ownership costs including rates, insurances and maintenance.
Kāinga Ora won’t occupy your home, or tell you what to hang on the walls, but they will have some say as a shared owner. Keep in mind that you’ll need their approval for any major renovation projects as a guard against over-capitalising on the property.
See our new guide for more details on the eligibility criteria and finer details of the First Home Partner scheme.
Need to re-fix this year?
If you need to re-fix your home loan this year, you’re not alone.
The Reserve Bank says that between October last year and September 2023, nearly half of Kiwis’ home loan debt is due to be re-fixed.
With uncertainty around rising interest rates, inflation, and cost of living increases, here at Tella we’re seeing lots of questions from homeowners who want to know what’s the correct strategy when it comes to re-fixing their home loans.
Is it better to go for certainty by locking in for a longer term such as 5 years? Or fix for 1 year and take the risk that interest rates will be in a better place 12 months from now when you need to fix again?
The answer is that the correct strategy is always the one tailored to your individual circumstances. And takes your plans for the next few years into account.
Typically, a 1-year fixed rate is the cheapest rate option, but NZ’s big 4 banks are currently pricing their 2-year fixed rates lower than their 1-year offering.
This is partially to do with competition amongst lenders. They all want your home loan business and are trying to make it attractive for you to switch (and then stay). Longer term rates (3-5 years) are also being priced lower than the 12-month options.
However, with most economists predicting rates to ease again from the end of 2023, there may be higher risk to you in fixing for a longer term, than a shorter one.
An important question to consider, along with individual rates and terms is: how ready are you to ride out your future interest rate jump?
Although higher rates are going to hurt, the comforting news is that lenders already factored in any potential rate rises when they assessed your home loan application. Their modelling stress-tested your ability to service their loan at higher rates, and concluded it was achievable.
But on the flip-side of this, any money you had earmarked for other purchases or activities will now go toward servicing your home loan for the period of your new term.
Get ahead of the rise now. Crunch your household budget. Reduce as much discretionary spend as you can. Also try to clear any outstanding debt (particularly high-interest credit card debt) to ease the pressure on your pay packet.
Those homeowners who are currently paying off more than the required fortnightly or monthly amount to pay down their principal more quickly, could look at temporarily dropping it back to only the amount required. This would shrink the gap between their current and higher re-fixed loan repayments.
Compare the latest interest rates for over 20 lenders here, or to us now to get the best deal when re-fixing this year. Our experienced Home Loan Specialists are available on 0800 4 TELLA (0800 4 83552). They’re here to guide you through these interest rate rises and will structure the best home loan option for you.
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