I always encourage Finax clients to think big. After all, being financially free is a big goal, why would you sabotage it with small thinking?!
The most common small-think that slows people down from building wealth is the tendency to tunnel-vision in on the cost of doing business. In the case of property investing, I am referring to interest rates. Yes, a 1% interest rate saving on a $600,000 loan frees up $6,000 of cashflow a year. Attractive, only if viewed in isolation. Given the context of our current house market, $6,000 a year doesn’t take you far in terms of your overall wealth.
Let’s look at the numbers a bit closer*:
A year ago in April the average house value in New Zealand was $631,147. Assuming a 1% interest rate saving on 80% funding at the time of purchase, you are looking at an annual interest saving of $5,049.18. Now fast forward to April 2018, average house value in New Zealand has increased by 7.6% to $678,856. A difference of $47,709. Do you see how the extra $5K cashflow from last year doesn’t get you far in terms of the current market?
I am not at all saying that you should forget about interest rates altogether. Instead, I think there is a need for a conceptual shift, in the mind of home loan customers, when it comes to interest rates. I always tell my clients to think of interest rate as the Official Cash Rate (OCR) and mortgage/funding rate as what lenders offer having taken into account your credit profile, their cost of funding, market share, and overall business goal at the time of lending. Competing on price (and nothing else) in any situation is just a race to the bottom, tell me, do you really want to spend the rest of your life scrimping and scrapping from the bottom of the heap? Other factors to think about also include the overall loan term and structure and whether they serve your purpose of building wealth with property. More often than not, the loan offer that funds you more generously, albeit at a slightly higher interest rate, is more likely to get you to your overall financial goals than those that compete purely on price.
Beside from the quality of the loan, think about whether you are working with the right industry professionals. I place a huge importance in working with brokers, lawyers, accountants, and advisors who are also property investors because they share my overall vision to become financially free with property.
*Average house value figures from April 2017 and April 2018 in this article derive from QV Residential House Value Reports which can be access here.
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