Category: Investor Loans

Whether you’re seeking a bare land loan or looking for a comprehensive development finance solution, structuring your loan repayments to meet your cash flow requirements will enable you to control your risk and maximise your return.

Below is a comprehensive breakdown of the three repayment types; principal & interest, interest-only, and capitalised interest, and the scenarios they are most suited to. Ultimately, choosing a repayment method that suits you and your circumstances will go a long way toward facilitating your financial success.

Principal and Interest Loans

Principal and interest loans have two components, hence their name. The “Principal” is the initial loan amount borrowed from the lender, e.g. a bank or a company like ASAP Finance. The “Interest” is the cost of Borrowing and is the extra money accumulated on the Principal over the specified loan period. This loan structure is most commonly adopted by banks for consumer homes loans, and they are designed to pay off a loan over a defined period (e.g. 30 years).

Monthly repayments are fixed and at the beginning, your monthly repayments consist of a small portion of the Principal amount, with the majority of the repayment consisting of Interest accumulated for that month. With each repayment the Principal sum is gradually reduced, meaning the interest generated each month gets smaller. With the monthly repayment amount fixed, this means a greater portion of the repayment goes toward reducing the Principal amount, and a lesser amount towards Interest. The latter part of your loan term is mostly dedicated to paying off the Principal.

At ASAP Finance, our clients are typically developers and property investors in need of short-term loans, hence Principal and Interest Loans are not often used. Instead, our clients seek to increase leverage to maximise return on equity. That said, it is important to understand P&I loans and their role in the world of property.

Interest-Only Loans

Interest-only loans are commonly used here at ASAP Finance. After borrowing the Principal amount, investors will only pay the interest accumulated on the Principal for the loan’s duration.

In this situation, the Principal doesn’t need to be repaid until the loan period ends. This reduces the mortgage repayments during the term of the loan and allows investors to direct their capital to other productive assets. As property values rise over time, investors can generate equity in their properties despite the fact Principal repayments are not being made to the loan.

Interest-only loans also present potential tax benefits for investors. If interest paid on a loan is tax-deductible, then paying interest-only maximises that deduction for the investor. Banks and other lending institutions typically offer a fixed term for Interest-only Loans, with the most popular period being about five years, after which the loan can revert to P&I or the Borrower can simply repay the Principal all at once.

However, interest-only loans also have a high degree of risk. The Principal still needs to be repaid and opting for an Interest-only structure defers this obligation and increases the total repayments required to repay the loan. Furthermore, funding costs can significantly increase when the term of the loan expires, and P&I repayments are required. Lastly, it is important to remember that should the property depreciate, you could end up owing more than the property is worth.

Is interest-only for you?

This loan type is for you if you are a property investor who is confident with managing money (often useful with commercial and industrial property finance).  Astute borrowers can optimise their tax position and benefit from the lower repayments, weighing the rising equity of their property against the interest repayments and Principal amount. By the time the interest-only period ends, you should be able to repay a significant portion of the Principal as long as you’ve adequately managed your assets during the loan’s term.

Capitalised Interest

A capitalised interest loan is our most popular loan structure. It is suited for property developers and in the primary repayment type used in development finance. Instead of paying a monthly interest expense, the interest is ‘capitalised’ onto the Principal amount each month. Once the loan matures, the Borrower repays both the Principal and the accumulated interest in full.

Most developers have their cashflow committed towards the project they are working on, making monthly repayments difficult. Lenders in the development finance industry also have a preference to adopt capitalised interest repayments as it underscores one of the most fundamental funding methods in development finance; funding on a ‘cost to complete’ basis.

Funding on a ‘cost to complete’ basis is where the lender retains 100% of the cost to complete the project, no matter what stage the project is at. Under this scenario, Interest repayments are viewed as a project cost, meaning the lender will retain the total expected interest cost within their loan facility. Each month, interest is drawn from the ‘capitalised interest facility’ and applied to the balance of the loan.

One of the important things to note about a capitalised interest loan facility is that interest is charged on the drawn portion of the loan, so the amount capitalised onto the Principal is not static from month to month.

For example, you may only draw 20% from the Loan Facility in the first two months of work, so interest is only charged on 20% of the Principal. At six months and 60% drawn, interest is charged on 60% of the loan amount.

Is capitalised interest for you?

Simple: this loan structure is for you if you are a developer. Adopt a clear plan for your development and you’ll be able to repay the Principal and interest upon completion of the project.

Funds for construction and development loans are only drawn down from the Loan Facility as and when they are required to fund each stage of the build. Smart borrowers with a clear plan for their developments can capitalise on this structure due to its unique interest scheme, as the actual interest paid by the Borrower is typically between just 55% to 70% of the headline interest rate charged by the lender.

Furthermore, delaying the interest liability gives the Borrower time to generate revenue before they must repay the loan amount.

Talk to the leading property finance company in Auckland about which loan structure suits you.

Our lending managers are experienced in all areas of property development, and we tailor a bespoke loan package to suit your needs. Talk to the Kiwi leaders in non-bank property finance for a hassle-free lending journey today.

ASAP Finance is an example of a reputable non-bank lender with strong business acumen and a history as a responsible lender. Our financial institution is the ideal place for those who want to accelerate development time frames and maximise return on equity. Unlike banks, we break down the barriers preventing your next project from getting off the ground.

Non-bank lenders tend to be privately owned and operated, which means they can adapt their services, fees, and company structure to create highly competitive packages for their clients. At ASAP Finance, we take advantage of this independence, dedicating more time to our clients’ needs and enabling them to mitigate key risk areas, as well as offering flexibility in funding processes and conditions. Since moving to Alert Level 2, ASAP Finance has settled $13 million in construction funding, with a further $25 million in funding approved for new projects.

Let’s dive deeper into the benefits of borrowing from non-bank lenders.

Greater Flexibility

As with the other benefits on this list, highly personalised customer experience and customised loan structures are key characteristics of non-bank funding. Much of this flexibility is due to the degree of regulation imposed on a given lending institution. Deposit-taking institutions (including both mainstream banks and non-bank deposit taking institutions) owe a duty of care to those who deposit funds with them and are heavily regulated by the Reserve bank of New Zealand. In contrast, ASAP Finance is a non-deposit taking institution and is privately owned and operated.  This allows us to decide on the level of risk we wish to accept, what conditions we impose, and the types of projects we wish to fund. In other words, we own our own risk and can adjust our services depending on the individual needs of our clients. We have the freedom to stretch Loan-to-value ratios, fund a higher percentage of total development costs, and present clean funding offers absent the traditional hurdles imposed by banks.

This flexibility also helps non-bank lenders like us to choose a niche vertical and offer a wide range of products suited to that vertical. We’ve found that many of our clients were unable to find loan structures that suited their needs prior to encountering ASAP, and we have our wide product range thanks to our flexibility as an independent institution. In our time working in the property development finance industry, we’ve been able to facilitate many remarkable projects without the interference of a third party.

Loose Credit with Fewer Conditions

Here are some examples of services enabled by greater flexibility and our commitment to making our clients’ journey easier.

Credit Policy

• Funding up to 90% of total development costs enabling developers to increase return on equity and free up cashflow to inject into other development opportunities.
• Funding available at up to 75% LVR for construction loans.
• No pre-sales required enabling clients to accelerate development programmes and ride rising market trends
• Fixed price contracts are not required; we back the experience of the builder and developer.
• Valuations are not necessary; we take time to understand our client’s product enabling them to avoid unnecessary costs. 
• We do not require a Quantity Surveyor or Valuation Progress Reports; we get our boots muddy to ensure progress payments are made on the same day as they are claimed by the developer/builder.

Loan Structure and Management Flexibility

• Creation of capital and debt solutions unrestricted by bank policy. If it makes commercial sense, there is a good chance we can structure a deal. We offer underwrites and joint ventures in addition to a number of creative funding solutions. The Vulcan, a 38-unit luxury apartment development is the result of our latest joint venture with Plutus Holdings Limited.
• Equity releases once the project has been de-risked (e.g. once civil works have been completed and the project is out of the ground).
• Ability to process drawdown requests on the same day. We understand that cashflow matters.

If you choose to move forward with a non-bank lender, you need to be sure of their reputation, capability and ensure that what they are offering is what you need. When it comes to working with ASAP Finance, our long history in property financing speaks to our experience, and our wide range of loans on offer and our bespoke capabilities open the door for everyone looking to fund their next development.

Do you need hassle free development funding?

Speak to the team at ASAP Finance today. We’re the leading non-bank lenders for development finance in New Zealand, and our priority is helping our clients get their projects off the ground. No two non-bank lenders are the same, so when researching your ideal institution, it’s important to understand their strengths and weaknesses. Get in touch with one of our lending managers today to learn more about ours.

Amid a widespread pandemic, the global economy is caught between cushioning the blow of a recession and planning for recovery. The impact on the property finance market will be significant, albeit mitigated by early policy responses from the NZ government and Reserve Bank. Comprehensive post-lockdown data is yet to be reported, and clarity as to what a post-lockdown economy will look like remains elusive. What is clear is that uncertainty will be a key factor in the property market over the next 12 months, and investment decisions need to be tailored accordingly.

Instead of floundering, the key is to look at economic indicators and use them to predict where the property market is going. Now is an optimal time for well-capitalised investors and developers to exploit current market conditions and prime themselves for a future where interest rates refuse to climb, and property prices detach from fundamentals. So, what should property investors do to survive the COVID-19 recession and recover on top?

Forecasting Economic Change & Recession Recovery

Many models of post-COVID recovery have been created assuming that we will be aiming for a “return to normal”, but this cannot be the yardstick we use. Big changes are predicted by financial analysts like Forbes’ Nishan Degnarain and the UK government, as data points continue to reveal potential changes to the “norm” and the adoption of a “new normal”.

A YouGov poll taken in Britain demonstrated that only 9% of people want to return to the ways of pre-COVID life, while the rest want to see changes in how their government approaches issues of the environment, the economy, and civilian aid. If these results are reflected in the wider world, this will mean potentially significant changes to consumer behaviour, altering the hierarchy of different sectors and adjusting the world to a “new norm”.

Factors closer to home must also be taken into account, such as the reduction in domestic travel between regions in New Zealand, decrease in international tourism, volatile ROI rates, job opportunity rates rising or lowering in different areas, and more.

Ultimately, it is important to remember that there are few (if any) facts to predict the future, and that the vast majority of theories about the future are extrapolations from past events. What we are experiencing as a global community has never been seen before, so we need to remain sceptical as to the possible outcomes.

Recovery Models for the Economy

Below are the best- and worst-case scenarios for recession recovery.

An L-shaped recession is the worst-case scenario for recovery, signifying long-term damage to the economy and minimal recovery for quite a few years. Luckily, this recession is unlikely due to governmental responses to the virus and stimulus packages being granted in many countries. However, this pattern is not impossible.

A V-shaped recession is the best-case scenario for a post-COVID world, indicating short but harsh consequences and a quick rebound with minimal long-term damage. This could be the future for New Zealand’s economy thanks to the quick reaction on the part of Jacinda Ardern’s government.

Economists are recommending approaches that benefit from the volatility and uncertain future promises, i.e. employ strategies that enhance returns whether the market shifts up or down. These conditions create an opportunity to protect against downside risk and increase income if the investor refrains from reactionary investment.

What New Zealand’s Economy Means for Property Investment

Forecasting is certainly not foolproof. However, using economic indicators and predictions from the country’s financial institutions can give us a glimpse into the potential future of the property industry.

Economic Indicators and Predictions in New Zealand

According to the New Zealand Treasury:

• Three of New Zealand’s major banks have downgraded their economic forecasts to be more pessimistic than they were, predicting a contraction of close to 20% in the June quarter and unemployment nearing 10% by the end of the year.
• Retail spending in every product (apart from consumables) has taken a sharp downturn in spending because of the lockdown, while unemployment claims from work-ready individuals have soared to nearly 120,000.
• If restrictions ease further in the coming weeks, the Treasury predicts the GDP will rebound in the September quarter (predicted at around 8.5 points of growth by major banks).

The current forecast is an appreciable rebound in September for New Zealand. So, what does the above mean for property investors specifically?

For Property Investors

The likelihood is that New Zealand’s recession will be short but harsh, creating buying opportunities for investors with strong balance sheets. Low interest rates mean that smart, well-capitalised investors can use this time to expand their portfolio and ride the wave upward, but only if they’ve accounted for their other costs in the worst periods of the recession. It is important to remember that availability to credit will likely remain tight over the near term, making early engagement with your funder a must. As it stands, market feedback has indicated that banks are limiting exposure to certain high-risk sectors with funding support limited to existing clientele.  

Our recommendations are as follows:

• Have a clear investment strategy that accounts for positive and negative changes. Be a realist and consistently consult data to determine your next move.
• Manage your risks, don’t over-invest.
• If you’re looking for loans, spread your lenders across bank and non-bank sectors if possible. If you’re not an existing client of a bank, consult a reputable non-bank lender that can help you with your investment strategy.
• Keep your focus on long-term fundamentals, such as low mortgage rates, dwelling shortage in urban cities, and more. (Source: Tony Alexander)

Here’s a shortlist of what we should all be keeping an eye on over the coming months:

• Unemployment
• Mortgage rates
• Migration
• Supply/demand
• Reserve bank policy
• Retail bank credit policy
• Rates of return for all asset classes
• Sales & listing data

Keep up with the latest shifts in property development finance with ASAP Finance

We’re New Zealand’s market-leading non-bank lender for property development finance, and we offer everything from bridging loans to joint venture investments. For more information on our services or to consult us about a hassle-free property loan, get in touch with a lending manager from ASAP Finance today.

By the end of 2019 the NZ property market was showing signs of improvement – one needed only to have attended a pre-Christmas auction to notice the stark contrast in mood as previously indifferent buyers appeared now excited and confident to freely ‘bid away’.

The turn in sentiment can be traced back to April 2019 when the coalition government decided to abandon a general capital gains tax as proposed by the TWG. Since April, monthly house sales have risen steadily to be around 13% higher in November 2019; even house sales in Auckland have rebounded 30% to around average levels.

House prices also shifted up a gear, supported by record low interest rates, with Auckland posting seven consecutive monthly increases and fully recouping the prior two years’ worth of losses.

CoreLogic Senior Property Economist, Kelvin Davidson noted recently that the solid economy – especially low unemployment – and favourable mortgage rates were playing a key housing market role too.

At ASAP, much of the above confirms trends we have already seen through the numerous developments funded throughout the course of the year. Demand for well-located and thoughtfully designed properties remains high and clients who have adhered to these simple principles have been able to sell down stock quickly and often above initial price expectations.

Higher density developments such as terraced townhouse projects continue to represent the bulk of our development finance applications at ASAP; not entirely surprising given the high demand we continue to see at the affordable end of the market. In fact, the sector has proved somewhat of a safe haven over the past few years during periods of lacklustre activity at the premium end of the market. With land prices at elevated levels and affordability at the forefront of everyone’s mind, we expect sustained focus on high density projects over the coming year.

Looking ahead to 2020, most major trading banks are estimating rosy conditions to continue with calls for property prices to increase between 5.0-7.0% including ASB and Westpac who both recently revised their estimates upward to 6.5% and 7.0% respectively. What appears to be clear is that the market is being driven by the fundamentals of supply and demand rather than speculators, which was a feature of the last upward cycle.

The Reserve Bank’s decision in December to increase capital reserve ratios, whilst less severe than banking pundits predicted, is anticipated to further tighten credit conditions whilst its decision to leave existing LVR restrictions unchanged should continue to keep a lid on the speculative market.

What remains to be seen is how the coalition government will respond in the build-up to the General Election and whether a new round of ‘regulation’ will give rise to a pause in market activity.

The New Zealand Reserve Bank’s long-signaled move to increase capital reserve ratios has in the end proven slightly less severe than some banking sector experts predicted. But it remains unclear what impact the move will have on interest rates.

Ultimately the banks will have to raise around $20 billion to reach the new safety requirements, the Reserve Bank announced in December. But they will now have seven years to do it, not five as originally suggested. And instead of needing to source the new capital solely from equity, they will now need to find roughly $11 billion of equity and can create the remaining $9 billion through issuing preference shares.

There are 26 banks operating in New Zealand, with 14 in the retail market. And it’s no surprise that the bulk of the increased capital demands will fall on the big four Australian-owned banks. The major banks in the sector will have to increase their total capital to 18 per cent, from a minimum of 10.5 per cent now.

But smaller banks such as TSB, Co-operative, Kiwibank, and SBS, will under the new regime require total capital of 16 per cent, which is up from what they hold now but below the larger banks.

What impact will the changes have on banking?

There are differing opinions on what impact the changes will have on the banking and wider financial services sector, what is certain however is that the result will be largely dictated by the response of the big banks.

It is likely that lending will be directed away from sectors where return on equity is low, with the capital requirements diminishing returns in sectors where risk re-pricing is not possible. Highlighted sectors include agriculture, small business lending, and unsecured consumer loans.

Within property lending itself, more emphasis is expected be placed on lower-risk sectors such as residential mortgages, rather than construction lending, which can be a higher risk.

At ASAP Finance we have already witnessed a redirection of borrowing into the non-bank sector, and it is not uncommon for our clients to approach us for development finance for projects which, a year ago would have been exclusively funded by a main bank.

A reduction in the supply of credit and banks holding lower risk-weighted assets has been a determining factor in analysts calls of increased mortgage pricing and decreased interest rates for savers.

The Reserve Bank is estimating that the changes could potentially increase borrowing rates by around 20 basis points – i.e., 0.2 percent. But some of the leading banks have predicted interest rates on mortgages and other loans could rise by more, with ANZ reportedly believing the impact could be up to 60 basis points, while Westpac stated it expected the gap could widen by 40 basis points.

In the lead up to RBNZ’s announcement, upside risks to mortgage interest rates and downside risks to lending painted a picture of low economic growth supporting calls that the RBNZ would need to drastically cut the OCR in 2020. Subsequently, RBNZ’s softer approach has led ANZ to suggest OCR cuts may be less than originally expected.

The next steps

According to Reserve Bank GM for financial stability Geoff Bascand, the bank has listened to the feedback and reviewed all the data and was confident the decision was the right one. The next step in the process will be consultation on a draft of the detailed regulatory requirements during the first half of next year, with the new regime taking effect on 1 July.

“Banks make profits from lending,” says the Reserve Bank. “The competitive market will continue and if one bank pulls back in a particular segment of lending, we expect another will step up.”

Stay up to date with the latest financial news at ASAP finance

As a market leading property finance company in New Zealand, ASAP Finance will keep you up to date on all things finance. If you’re looking for expert financial advice, don’t hesitate to get in touch with our team. Our team can help find solutions to a range of complex funding applications.