Don't bank on cheap home loan rates - investors warned
Interest rates could rise faster than expected and put the squeeze on highly-leveraged investors, it has been claimed.
Peter Lewis, vice-president of the Auckland Property Investors Association, is warning new landlords to be careful of banks "dangling carrots" to entice them into large amount of lending.
While loan-to-value restrictions (LVR) now limit the amount of lending banks can do to borrowers with small deposits, many new landlords are taking out big loans against the equity that has built up in their houses.
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Lewis said that was particularly the case for retirees who could no longer get a good income from investing their money with a bank.
"Many local investors, who are dependent for their income on a return from their accumulated capital have seen their real income from money-market investments drop, and are now moving their capital into residential investment property.
"Efforts by the Reserve Bank to stem this flow appear to have had little effect, as most of these investors are well funded and financially astute."
Incentives such as holidays and free phones offered to new borrowers might appear attractive today, but when interest rates were no longer at historic lows, those who had borrowed too much would feel the pinch, Lewis said.
Increasing house prices had also pushed down rental returns, so investors had less income to help them cover their loan payments.
"The property price boom has reduced the available return on rental property from a historic 8 per cent to 10 per cent down to a new low of 4 per cent to 5 per cent," Lewis said.
"While this level of return may be considered adequate by a novice investor when interest rates are at the current levels, those with more experience will be also considering future interest movements."
He urged investors to consider how they would service their loans if rates returned to more normal levels.
"At some point, it could be next year or it could be in 10 years, things will change. If you've hooked your economic future on interest rates being 4 per cent you could be in trouble."
Aaron Drew, principal economist at the New Zealand Institute of Economic Research, agreed.
Homeowners and investors needed to understand that interest rates could return to pre-global financial crisis levels, when floating rates topped 10 per cent, he said.
People tended to get used to market conditions quickly and did not consider that they could change.
The difference between a $500,000 home loan at the current floating rate of 6 per cent, and a rate of 10 per cent is $573 per month.
But Drew said the biggest problems would occur if house prices fell at the same time as unemployment grew.
That could leave some investors in negative equity, unable to charge more rent and unable to sell.
But property commentator Olly Newland was unconvinced.
"I don't think [rates] are going to go up for a long time. The worry is that rates are going to go down. The chances at the moment [of higher rates] are zero."
Bankers' Association chief executive Kirk Hope said: "Banks are responsible lenders. Historically low interest rates do not change this."
A key factor in any lending decision was the customer's ability to repay the loan, he said/
"In the current environment banks will take a wider view and base their credit decision on the customer's ability to repay at a higher interest rate.
"Banks are all about managing credit risk, and a failure to do so wouldn't be in either the bank's or the customer's interests," Hope said.