ASB has launched a new product called “Back My Build” with a cut-price 1.79% variable home loan rate for new builds, as the lender attempts to encourage the lending for building a new home from scratch or purchasing a home and land package. In this post, we’ll explain how ASB’s Back My Build works and share our perspectives on the benefits and what needs to be aware of about the product, so that you can make an informed decision.

ASB Back My Build home loan variable rate

Video Timeline 1. ASB launches a home loan for new builds with a 1.79% floating interest rate 00:45 2. What are the benefits of ASB’s 1.79% home loan rate for new builds? 02:26 3. What you need to be aware of? 04:49

1. ASB launches a home loan for new builds with a 1.79% floating interest rate

In the middle of this May 2021, ASB announced a new lending product called “Back My Build”, offering a 1.79% floating rate mortgage on home loans designed for:

• building a new property (as your family home or rental property)
• purchasing a new build

The beauty of this product is that you can have access to a market-low variable rate of 1.79%, substantially cheaper than their standard variable rates of 4.45%. What a significant saving! This special rate will be available for up to 36 months when the customers make their initial drawdown. Housing supply is a huge issue in New Zealand, and banks are keen to provide a leg-up to people who want to build or purchase a new build. For example, ANZ recently announced to tighten servicing for rental property income, in line with the government’s recent change on interest deductibility rules. But new builds are exempt from the rule. Whilst ASB so far is the only bank that introduced this special rate for new build, and we believe other banks are more likely to follow suit in the near future. That means if you’re thinking about building your new home or investment property, or you have an existing package that is ready to settle soon, you may have more choices other than ASB.

2. What are the benefits of ASB’s 1.79% home loan rate for new builds?

(1) Save interest costs

Back My Build becomes the cheapest home loan (1.79%) in the market, 46 basis points cheaper than the one-year fixed terms at the other major banks which sit around 2.25%. But in general, if your property is still in the process of building, your loan should be at a floating rate. Currently, the standard floating rate at ASB is 4.45%, even you are lucky to have discounted floating rate, you are more likely to pay around 3.7%-3.8%. Compared to these rates, 1.79% for new builds can help you save a lot in interest costs.

(2) Relieve the overall cash flow pressure

Given the recent interest deductibility rule (interest cost cannot offset the rental income), you may have negative cash flow on your rental properties. If you can build your new property using this market-low rate, it can offset the negative cash flow in your other investment properties even though it only lasts for a couple of years. So it’s a bonus from the cash flow perspective.

(3) Relieve the cashflow pressure when building the property

Say you’re building your new home, and you’re still renting a house to live in. This means you’re paying the interest cost on the construction loan and the rent at the same time. If you could have a much lower variable rate, it can help you minimise cash flow outgoings. So it’s a very welcome product.

(4) Standard construction can be converted to Back My Build

If you have an existing ASB progress payment construction loan that is not fully drawn down, you can convert your standard construction loan into this new product, Back My Build, and enjoy the low rate.

(5) Back My Build also applies to the loans over 80% LVR

When you borrow over 80% of your property’s value for owner-occupied property, normally, you get little discount off the standard interest rates. But in this case, you can still have access to this super-low interest rate. However just be aware the Low Equity Margin (LEP), will apply. The actual LEP charged depends on the loan to value ratio (LVR), and the LEP for each LVR band is set out as an example below:

• 80% – 85% LVR: 0.3% LEP margin
• 85% – 90% LVR: 0.75% LEP margin

Nevertheless, Back My Build can still help you save a lot, cheaper than other banks’ rates.

(6) Fix rate at any time

The customers of Back My Build are free to fix their rate at any time, in case of the floating rate rising later. Overall, Back My Build is a good product, and it applies to all kinds of home loan for a new built in terms of owner-occupied or investment purpose, or high LVR type of lending.

3. What you need to be aware of?

Since the product was launched, we’ve received some questions and some of them that you might want to be aware of, so that you can weigh up the pros and cons and make an informed decision.

(1) Floating rate

The nature of this special rate is floating rate, which means the rate can change at any time, and there’s no guarantee of remaining the current low rate of 1.79%. But in our view, the variable rate probably stays at this level or only increase by a small percentage over the next year or two.

(2) No cash back

Unlike borrowing for other standard home loan products with receiving cash back after settlement, there’s no such a cash back for Back My Build, unless you incorporate green design into your new build. ASB has partnered with the New Zealand Green Building Council to encourage Back My Build homes to incorporate sustainability principles, by reimbursing customers $2,000 if they can evidence their intent to build a 6 Homestar rated home (or higher) by asking a build to apply for the assessment.

(3) Application fee

A loan processing fee of up to $400 will apply.

(4) Additional cost for over 80% LVR

As mentioned above, when you borrow more than 80% of your property’s value, you will be charged an additional rate called LEP (low equity margin) on top of the special rate of 1.79%. It is an additional interest rate, but again probably still cheaper than standard home loan product discounted interest rates.

(5) Not available for purchasing land or renovation

Back My Build cannot be used solely for vacant land purchase. The loan for buying a land is still at standard pricing. However, you can refinance land to this product variable rate once start drawing down funds for construction. Also, the Back My Build variable rate is not available for renovation purpose. Renovation is not eligible regardless of how substantial it is.

(6) Not available when categorized into commercial division

The special rate of 1.79% cannot apply when you fall under the commercial division at ASB, such as:

• you build the property for the purpose of sale, like builders or developers.
• You want to hold the new build, but the new build has multiple dwellings.
• You build a commercial property.

(7) Your borrowing power from ASB may be less than from other banks if the property security is for investment purpose

If you deal with ASB to buy or build a property for investment purpose, you potentially borrow less than other banks. This is because ASB only allows for the maximum of 25 years (instead of 30 years) to repay investment property loan, 5 years less than other banks. For example, we recently have a client who is about to settle the off-plan apartment and the apartment is for investment purpose. They’re eligible for ASB Back My Build, but they have to pay principal and interest on the 25-year loan term. As a result, the repayment amount worked out to be more than if they borrow from other banks with a 30-year loan term at 2.25% 1-year rate. In this case, if the clients switch to this product, they’re going to pay more, which may increase their pressure on cash flow.

Will other banks follow suit and offer special rates for new builds?

At the time of writing (4th of June 2021), ASB is the only bank that launches a special rate for new builds. In our view, other banks may follow them in the near future because the recent trend is banks are more in favour of new builds, and they’re keen to give a leg-up to those who want to build or buy a new build.

Prosperity Finance – Here to Help

Any questions about the new product at ASB? Or thinking about purchasing or building a new build? We’re here to help. Call us at 09 930 8999 to have a no-obligation chat with one of the financial advisors at Prosperity Finance. Read more: ANZ tightens servicing for rental property income, will this affect you? Is it still a good time to invest in property? The interest rates are dropping again, not as predicted by economists Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.