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property investment
sandy richardson
Mortgagee sales –
how to avoid them
Nobody likes to see a mortgagee sale. Sandy Richardson reveals the
most common ways property investors get themselves into trouble.
Property investors are well known for trying to
secure a bargain. One area where property investors
have a particular appetite is mortgagee sales.
In New Zealand mortgagee sales actually
declined last year, from 3024 in 2009 to 2434. The
three main centres experienced some of the biggest
declines, with Auckland seeing a 35% drop. We are
also able to see a significant downward trend in
mortgagee sale listings over the past three years. 1
Of course, property investors can sometimes fall
victim, and lately you may have seen some media
activity around increased mortgagee sale listings.
So how can you prevent yourself from becoming a
mortgagee sale statistic?
Common pitfalls
Not surprisingly, banks see common themes
recurring when it comes to mortgagee sales. One
that stands out by a clear margin is investors not
correctly calculating their expenses.
• Many landlords think positively and assume
100% occupancy (it’s easy to do when the current
market sees rentals in such high demand) and do
not budget for unexpected vacancies or a change in
the market. Such vacancies can occur for a number
of reasons: tenants can vacate unexpectedly, finding
new tenants can be delayed, or you may even decide
to (or need to) keep the property vacant for a period
for renovations or repairs to be completed.
• Good investors will put aside funds to cover
repairs and maintenance. But if it’s a bad year and
multiple issues occur in a short period of time, the
kitty sometimes isn’t enough to cover the bills.
• Interest rates, are subject to change and are
the biggest expense for any property owner. New
Zealand has been experiencing some historically
low interest rates with the variable rates sitting
around the 6% mark. With the 10-year average
variable at over 8%, consideration must be given to
future fluctuations. The average investor has around
$400k of borrowings, so a 2% interest rate increase
would mean an additional $300+ in interest per
fortnight, with the majority of this having to be
funded from the landlord’s pocket – good luck
trying to put the rent up by this amount!
The other major factor is not treating property
investment like a business. Such as:
• Borrowing the rent for personal use.
• Relying on the tenants paying rent on time all the
time, and not acting quickly if payments are missed.
• Not reconciling rental income and expenses,
or having the funds available for expense payments
– such as insurance, rates, body corporate fees and
so on.
• No separation between personal and rental
accounts, or between rentals for those investors
with multiple tenancies.
Some of these components will be factored by
the bank on your behalf when assessing your loan
request. For example, rental income is generally
discounted by at least 20% and for some other
banks, as much as 30% to account for vacancy and
repairs and maintenance. The interest rate used for
assessing your ability to repay the debt is adjusted to
incorporate interest rate fluctuations.
Other options can be as basic as ensuring you
have separate accounts for personal and rental
use – and for each tenancy or property. Try having
separate accounts for each rental property and
its associated repairs and maintenance. BNZ’s
TotalMoney is great for this.2 Not only do you get
up to 10 accounts which can be individually named,
but their combined balances can be offset against
your floating home loan, reducing your total interest
expense. Additionally text and email alerts are
available to notify you when credits, such as your
rent, are received.
The other thing to keep in mind is to talk to your
bank. The earlier your bank is brought into the loop,
the more likely you will be able to avoid becoming a
statistic yourself. There are options and mortgagee
sales are often the last resort
Account opening, lending
criteria, establishment or
redocumentation fees apply.
Not for business purposes. Full
details, terms and conditions and
our current Disclosure Statement
and Qualifying Financial Entity
Disclosure Statement available
from any store or www.bnz.co.nz.
2
Sandy Richardson is
a Sales manager at
BNZ and heads the
specialist Residential
Property Investment
team. Visit bnz.co.nz/
rentalproperty or
phone 0800 269 009 to
find out more.
This article is
intended for general
discussion. The views
expressed are her own
and do not necessarily
represent those of BNZ.
BNZ acknowledges Terralink for the provision of
regional Mortgagee sales data for 2009 and 2010.
Permission granted to reproduce this data.
1
www.propertyinvestor.co.nz // NZ property investor 47