COMMENT: ASB yesterday announced a new product called Back My Build. The product comes with a record-low interest rate of 1.79% as a floating rate and is designed to help customers who are building from scratch or purchasing a home and land package.
It’s the first strong signal from the lenders that they are on the same journey as the Reserve Bank to promote new-build properties in New Zealand. The product comes with a $2,000 cash contribution if the property is Homestar 6 or better. While they are not the first bank to offer an additional benefit to buyers of the HomeStar rated homes, it is good to see this included.
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Purchasers who have bought before will note that the cash contribution is actually lower than a normal cash contribution for most mortgages. Borrowers of, for example, $500,000 could often expect to receive $3,500-$4,000 as a cash contribution so clients must choose whether to take the lower cash contribution with the lower interest rate or higher cash contribution with a higher interest rate.
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Investors who were looking for yet another reason to investigate a newly-built property over an existing property should add this product to their list. New builds are currently exempt from the LVR restrictions meaning buyers only need a 10-20% deposit rather than a 40% deposit.
Additionally, the interest on a new-build mortgage is likely to be tax deductible - to be confirmed closer to October - and now the amount of interest will be significantly lower than other borrowing methods meaning the cashflow for a new property would be even higher.
All of this plus the fact that a new-build property will need little or no maintenance in the near future, unlike some existing properties, and this makes new-build properties seem almost irresistible to investors looking to purchase.
First home buyers have slightly fewer benefits than investors. New-builds are slightly easier to borrow on with a small deposit and the financial benefits of having little or no maintenance shouldn’t be ignored. There will be a number of first home buyers in the past who have used all their deposit to purchase an existing home only to discover an unexpected issue - leaks, cracks etc - that need fixing straight away. Buying new largely avoids these unwanted surprises.
As the ASB product is a floating rate there is a chance that, if the OCR rises, this interest rate will rise with it. However, clients are free to fix at any point so could fix their mortgage if the floating increases beyond the fixed term rates.
Floating accounts also mean buyers can pay additional money onto the mortgage without penalty. These additional payments can mean large savings later in the mortgage so are worth taking advantage of.
The unintended outcome of the lenders supporting new-build homes may lead us further down the path of a market dichotomy where existing houses are sold for less and new-builds are sold for a premium however this doesn’t seem to be showing in the statistics quite yet.
I think the main trigger for this scenario would be investors deciding to sell existing properties to replace them with new builds. While not an ideal outcome, it could mean more housing supply on the market for first home buyers which, as a result, gets more people on the property ladder.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
