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Newsletter from Homelink Enterprises at http://www.ehomelink.co.nz
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"If you look to others for fulfillment, you will never be fulfilled.
If your happiness depends on money, you will never be happy with yourself.
Be content with what you have; rejoice in the way things are.
When you realize there is nothing lacking, the world belongs to you."
- Lao Tzu

"Adulthood is defined by the willingness to except full responsibility for where you are at in life; no longer blaming others or circumstances."

Vendor ‘out’ clauses in the S&P agreement
Sometimes a vendor will insist on putting an out clause in the S&P agreement which can seriously impact on your ability to purchase the property. Try and avoid any clauses unless they are in your favour as purchaser. In the event of you being the vendor then the situation would of course reverse. There are various ‘out’ clauses, if the vendor wants a better offer clause try and negotiate for the unconditional offer clause to be inserted instead. The latter will usually give you more time to organize finance etc and complete the purchase of the property.

a) Better offer clause. In this case the vendor can accept any other offer to purchase, providing it is deemed “in the vendors opinion” as being better than the existing offer. It may be that the new offer will go unconditional earlier, offer more money (even $1), there is no other property to sell before going unconditional etc.

b) Unconditional offer clause. In this case the vendor cannot accept another offer unless it is an unconditional offer which gives you, the purchaser a better chance to organize finance etc

In both cases the vendor will need to give you a number of “working” days notice so that you have the opportunity to go unconditional before the vendor can legally accept the backup offer. The usual amount is either 3 or 5 working days. In the case of you being the purchaser, then the longer the better.

If your finance is arranged and approved ‘subject to valuation’ and the valuer cannot have the report to the bank within the time bracket given should an ‘out clause’ be activated, then you need to speak with your solicitor and decide on the element of risk should you decide to go unconditional regardless. The bank is within their right to decline finance should they not be happy with the Registered valuation. If you think there is any risk about that happening (it’s not always clear cut) then it is better to have lost the valuation fee than run the risk of losing your deposit and not obtain finance to settle. Your solicitor can advice you but in the end the risk is yours, so think carefully.

To Fix or not to Fix

Clients often ask me as to what period they should fix their rates. The following is an article written by the chief economist of the ASB, which gives some interesting information in this respect. I apologise for including the full length article but felt it was really worth reading.

Local home loan rates have recently risen lately and the Governor of the Reserve Bank of New Zealand warns of further rate hikes to come. A similar pressure is being applied in the US, albeit from a considerably lower level. The message is very clear but what does it mean for the merits of various fixed rate terms?

The following note offers an opinion. It backgrounds recent and expected interest rate trends, discusses some of the possibilities and provides some perspective that hopefully helps you to choose the interest rate term best suited to you.
The background to rising interest rates

New Zealand has experienced large shifts in home loan rates over the last thirty years with the overall interest rate trend having been downward. Rates well above 20% p.a. were the norm in the mid 1980s while ASB Bank's 6-month Home Loan rate reached a low of 5.99% last year. The cause of these changes can be traced back to inflation.

The inflation rate was very high in the 1980s but is much less today (most recent NZ inflation rate is 2.4%). And it should remain low given the explicit targeting of an average inflation rate around 1-3% p.a. over the next few years. Hence a return to the high first mortgage rates of the 1980s, or even the above 10% rates of the 1990s, should be avoided.

However interest rates will continue to cycle up and down as inflationary pressures wax and wane and it is probable that the low point of the 30-year adjustment from high to low inflation has not yet been reached.

First the cycle. The RBNZ adjusts the overnight interbank cash rate to influence the inflation rate, pushing the cash rate up when inflation pressures are high and pushing the cash rate down when inflation pressures are low or diminishing. The cash rate changes feed through to a wider set of interest rates in the wholesale money and bond markets that, in turn, feed through to retail carded rates such as Home Loan rates.

Right now inflationary pressures are building, not only here but in many parts of the world. It is partly the result of the stimulatory international policy environment put in place in 2001 when many countries experienced recession (NZ was one exception). This is showing locally as higher international prices for many goods at present e.g. oil. It previously also was felt locally as strong offshore demand for NZ property. Locally the key influences have been a strong economy and rising house prices, set against a diminishing amount of spare capacity to meet future local and international demand e.g. the local unemployment rate now down to 4.0% of the workforce.

The mounting inflation pressures will see New Zealand experience an inflation rate above 3% p.a. early next year. And probably an inflation rate persistently near or above 3% p.a. throughout 2005. This in itself is not an issue for the RBNZ - given their focus on the average over several years - but it does raise the risk that a high inflation rate takes hold. This situation has the RBNZ on alert.

In such times of rising inflation pressures and tighter monetary policy it is not unusual for home loan rates to rise 2-3% or more over the a period of 1-2 years. To date Home Loan rates have increased around 1-1.3% this year from 2003 lows (the increase being different for various Home Loan rate terms).
Viewed from this perspective Home Loan rates of fixed terms greater than 2 years have an appeal, providing some 'insurance' against an unknown but a potentially large rise in home loan rates (to maybe 9-10% p.a.).

That said, there is a widespread belief - although no one knows for sure - that interest rate hikes will prove less than usual in this tightening phase due to high household debt levels and the generally competitive international environment. ASB Bank forecasts are for Home Loan rates to generally rise around another 0.5% over the next six months.

Thinking beyond the next year or two, the longer term range for home loan rates will probably be around 5%. The ASB Bank Variable Home Loan rate has ranged 2.25% in the last 5 years (6.50-8.75%, average 7.66%) and 5% in the last 10 years (6.50-11.50%, average 8.66%).
It is probable that the low point of the range for the next 10 years will be somewhere around 5% (maybe lower). Sometime during the next 5-10 years NZ will probably experience a recession - at least that's what the history of business cycles indicates. And just as the recessions in the US and elsewhere early in this decade delivered the lowest interest rates in 40 years so too NZ will likely experience its 40-year interest rate low at the next recession.

From this perspective then home loan rates today are not low. But then neither are they high. They are probably just above the mid point of a, say, 4.5-9.5% range to be expected over the next 5-10 years.

In sum,
• The immediate pressure on rates is upward
• Rates are expected to generally rise around another 0.5%
but history has shown that greater rates hikes are possible during times of rising inflation.

This suggests fixed rate loans are a good option at present: fixed rates are moderate; and they guard against the risks of sharp rate hikes in the next year or two.
But rates are not near the low point of the past and probable future interest rate cycle. Some borrowers may choose to trade off the security of fixing for 4-5 years against the possibility of low rates when the current tightening phase has passed (and pay a lower fixed rate in the interim).

That is a personal decision that will depend on one's tolerance - financial and psychological - for interest rates possibly rising higher and for longer than projected opposite.

The following section discusses further some of the advantages and disadvantages of various Fixed Home Loan terms.

The 1-year rate continues to have many advantages

• It is below most other rates and
• It is below the expected Variable rate.
Other advantages mainly apply should the economic situation worsen and rates decline:
• The potential to make fee-free early repayments next year and
The potential to re-fix at a lower rate.

The major disadvantage is that should rates actually rise, as more likely, then higher rates will apply when coming off the fixed term next year.
Advantages and disadvantages of various Fixed rates

Plus the rate is now above average (1999-2003 average of 1-year rate was 7.0%).
There are 6-month and from time to time 18-month Fixed Home Loan rates. The 6-month rate does offer a low rate but there is the likelihood of a higher rate in 6 months time. The 18-month rate typically shares the characteristics of 1- and 2-year rates (when available).

The 2-year fixed rate offers at present the advantage of a rate that is close to average (7.4% 1999-2003) and below the expected Variable rate.

With the added advantage of surety for a longer period.

• Rate above 1-year (possibly only for first year though);
• Missed opportunity for lower rates should economy worsen;
but also still the risk of higher rates after fixed term if inflation risks become much greater.

The 3-year rate offers the advantage of reducing this last risk even more.

It is also only slightly above the five-year average for the Variable rate (7.66%) and below the expected average Variable rate for the next three years.

• Missed opportunity should global and local economies worsen and rates fall again;
plus higher immediate rate (versus 1- and 2-year rates).

The major disadvantage of the 5-year rate is that the rate is above other fixed rates and also above the five-year average for the 1-year rate.

Other disadvantages:
• Missed opportunity if rates do decline;
and a higher early repayment fee should rates decline.

The advantage is interest rate surety for the next 5 years and protection against very high interest rates.

The last word

The last word remains the same: nobody knows the future. The above notes hopefully provide some perspective to current trends and help with the decision about fixing loan rates. They do not, unfortunately, describe what will happen. You need to weigh up your own situation against possible rate changes - expected and unexpected - to find the term best suited to your needs. Feel free to phone Homelink Enterprises 09 236 3398 or email [email protected]