By Janine Starks*
From my mailbag:
Dear Janine: I own a house in Christchurch and a rental in Wellington. The Christchurch home has a fairly big mortgage and I only have a small amount of equity in it. I’ve broken up with my partner, but she will live there and rent it as she has no income and two kids of her own. Should I fix the interest rate on this or stay variable? The Wellington rental has been on the market for two years. I can’t seem to sell it, so I wondered if I should swap it for a house in Christchurch. I had a long period where the house wasn’t rented and I really struggled and ran out of money every month. I want to pull the capital out as I don’t want to be back in this situation if interest rates rise. I feel like I’m in a trap. Any thoughts?
Trapped indeed. More like shackled by the ankles.
You almost caught me out with a red-herring. You asked about going fixed or variable on your mortgage, but that’s only tinkering at the margins and won’t unlock the shackles.
But as you asked, most experts think you should be fine on variable rates over the next year, with these edging up nearer the end of 2012. Banks are no longer as exposed to short-term borrowing offshore, as our Reserve Bank is run by a pretty sensible bunch who developed something called the ‘Core Funding Ratio’. It’s made our banks more stable and able to withstand the credit-rating downgrade, without mortgages becoming more expensive.
The economy is also flat as a pancake, so there’s not much pressure in the system. Think about increases being more of a slow-creep in the next couple of years. Make sure you speak to a mortgage broker about whether you’ve got the best deal.
The ties that bind
The big picture is that you need to to decide what shape your life takes – not just financially, but also regarding a relationship. Money and women tend to end up intertwined and your situation is quite an example of that.
Would you be content with a more financially simple life, with one home and a partner to enjoy that with? As an outsider looking in, you have a far from simple life. There are three sets of income (your wages and two lots of rent) to juggle against two mortgages, upkeep on two houses and your own accomodation costs. You carry all the shortfall and all the risks. You have no home of your own to live in, because you are letting an ex-partner and her children live there.
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Would you feel guilty asking your ex to move on? I assume she has no claim on your assets, but this really must be checked with a lawyer. You say she has no income, but that is her choice not to work. We all have to take financial responsibility for ourselves. Will the rental arrangement feel wise when your ex finds a new partner and he moves in? If there are reasons she can’t work, like the age of her children or a lack of skills, the benefit and housing system is there to support that.
If there is some form of cheap rental arrangement going on, it would be far cleaner to make it transparent with a time limit. She could move to a new flat and you could contribute to the rent for set period. Then it ends.
Think about your own future. Would you like a new partner? Your current situation sends up smoke signals that you probably can’t smell, but rest assured, the female species can sniff them at a hundred paces.
You are a bloke and I bet you view your ex in a fairly black and white way. But how does a prospective new girlfriend look at it? I’m afraid it’s like a red-rag to a bull. She will wonder why you are not living in your own home. She will ponder if the ex is getting a rental discount. If so, she will wonder why, when the children are not yours. She will assume you are using the discount to maintain contact.
If the rent is at market rates she will find it odd that you both choose to keep a landlord-tenant arrangement. She will be concerned about how to form a financial future with you. These assessments will take about 2.5 seconds to make and a very long time for you to un-make.
Let me call a spade a spade. Women do not like their partners lives to be financially intertwined with their ex’s. They don’t like it, because these financial links are really emotional links in disguise. If you want to attract a new partner, you need to consider how your financial decisions could impede that.
Rental property in Wellington
It seems wise owning a rental property, but unless you’ve got a great paying job, a partner with a second income, or plenty of equity in them, it's tough going. It sounds to me like you’re missing all three of those components and it’s wrecking your happiness.
That trapped feeling is being caused by the Wellington house not selling, but I’ve never met an agent who can’t shift a property at the right price. The market is telling you something and you’re not listening. That ‘right price’ might mean you lose some or all of your original deposit depending on when you purchased. It becomes a hard decision, but it’s one you’ll have to face up to.
Get the agent to ring everyone who has seen the property and collect ‘feed-back’. Reset the price.
You talk about swapping the Wellington property for one in Christchurch. Cantabrians who are buying and selling right now are doing so out of necessity, not choice. Why would you choose to purchase an investment asset in a city that is still seismically active and ignore those risks?
Half the citys housing stock is in fairly good order, but they’ve still been subjected to nearly 8,000 quakes and continue to be rocked regularly. It’s very likely that new-built homes in the city will hold their future investment value far better than pre-quake repaired homes. A two-tier property market will quietly form. Those with plenty of cash might buy-up in the hope of seeing an influx of construction workers and higher rents, but there is a good degree of risk in this and it’s not a strategy for the cash-strapped punter.
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*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer. These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.