Latest Changes to NZ Interest Rates & Building your home
Business Owner and well-respected Mortgage Broker, Ben from Ascend Financial has outlined the current interest rate situation in New Zealand. If you are thinking about building your own home due to the change in interest rates, then this blog post is for you.
Weak economic data ultimately forced the RBNZ to act, drooping the OCR by 0.5% on 9th October 2024 to 4.75%, it was seen as timely and required as high rate damage has been overdone. Anticipation is building for the next OCR announcement on 27th November 2024 with a further 0.5% reduction expected which will bring the OCR down to 4.25%.
What can we expect for the next year?
After November 27th, the next OCR announcement isn’t until 19th February, and the general expectation is for another 0.25% reduction. If this happens, borrowers can look forward to one-year rates dropping to around 5% for 1 year.
Following that, the OCR is reviewed every 6 weeks to November. My opinion is that next year will drop 0.25% at a time until it hits 3% OCR, then will pause and review and adapt to whatever is happening at the time from there. This translates to a 1 year fixed rate around 4.5-5%, but is dependant on a number of factors including where the banks see the rates going/ wholesale rates etc.
Building your own home:
A step by step guide can be found here - https://www.ascendfinancial.co.nz/development_lending/
In summary:
From a lending perspective if you are looking to buy a section and do a build (not a turnkey), then the banks will always mandate 20% deposit on the land purchase alone.
From there you need as little as 10% deposit in the overall project cost.
So lets assume you buy a section for $500k and the total cost including consents and build contract is $500k, that’s $1m total cost.
You will put in $100k on the land which is your total 10% on the $1m, meaning the banks will then fund the entire build from there.
If you have existing property already and its an investment property, you can go as low as 15% deposit total, but we recommend 20% on the total cost.
Less than 20% deposit or equity for any deal incurs a low equity premium to your rate and less cash incentive from the bank for signing with them.
In terms of the approval process, we can start before you find a piece of land. We can assume a reasonable amount for the build or better talk to a builder to give you a rough idea of what you like which we can use in the application.
Once approval is obtained we will have a limit for the land and limit for the build in place to work to.
Information required for a loan application:
Application form detailing your statement of position (assets/liabilities/income and expenses)
Last 3 months bank statements for all accounts both business and personal
Passports and driver’s licenses (and visas if overseas passports)
Proof of income (any source of income you have needs to be verified).
Financial accounts if self employed
Payslips or employment contract
IR3’s
Tenancy agreements or rental appraisals
Flatmate income shown regularly in bank statements or a border letter can be signed if you will have a flatmate in the new house
All debts need to be verified, so any personal or business loans require statements
Any credit cards need last 3 months statement
Buy now / pay later screenshots of limits
Student loan balance screenshot from IRD
As part of the application or after preapproval, build specific items include:
Draft build contract or quote detailing all the costs itemised for the build (ideally this is a fixed price contract and includes the consents cost also so all costs are packaged into one contract which means we can establish a drawdown schedule for progress payments as costs fall due.
Banks don’t like it when things are piecemeal, and clients project manage.
Will need to obtain building consent (if there is more than one dwelling, also a resource consent and EPA (Engineering Plan Approval).
Stamped plans that come with that approval
A registered valuation is always required before drawing down any debt on a build regardless how much deposit you have.
Sale and purchase agreement for the land purchase
Assuming you are building shortly after purchasing land, it is best to engage an architect and builder as early as possible to start draft costs and feasibility. It is crucial to get all your ducks in a row before overcommitting.
A good mortgage advisor/builder/architect will protect you from getting into a bad situation or overcommitting.