Reserve Bank announces new nationwide Property Investor restrictions
You may have seen that the Reserve Bank announced pending changes to loan-to-value restrictions (LVRs) to further mitigate risks to financial stability arising from the current boom in house prices.
All Property Investors will now need a 35% deposit for an Investment Property Loan from a Bank, and Banks will have to further ration their Owner Occupied High LVR Loans (over 80%).
“The banking system is heavily exposed to the property market with residential mortgages making up 55% of banking system assets. Investor lending has been increasing rapidly and is a significant contributing factor to the current market strength. The proposed restrictions recognise the higher risks associated with such lending” Governor Graeme Wheeler said.
Details under the new restrictions:
• No more than 5% of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 65 percent (i.e. a deposit of less than 35 percent). What this means to you is that, if you wanted to purchase an investment property or wanted to release some equity from an investment property, then in most instances your loan will be limited to a maximum of 5%.
• No more than 10% of lending to owner-occupiers across New Zealand would be permitted with an LVR of greater than 80 percent (i.e. a deposit of less than 20 percent). In Auckland, this is no different to current restrictions. However, this brings the rest of New Zealand in line.
• Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt. The intent is to slow down the property price increases, and building new properties helps increase “stock” or the amount of residential homes.
The Reserve Bank has also stated that they have made some progress in limiting borrowing through a loan-to-income restriction, but apart from speculation, no other news about that as yet.
These changes are to came into effect in 2018, but it is expected that banks will observe the spirit of the new restrictions in the lead-up to the new policy taking effect. In speaking with one lender yesterday, a senior representative suggested that his company would apply the restriction with immediate effect for new applications.
Please note, however, that Masters Home Loans has a relationship with the 4 main banks and over 20 other lenders, many of whom are non-banks. The restrictions do not apply to non-banks. We are still able to negotiate and work around the banks regulations so if you think you may be impacted by these changes, please feel free to contact Sasha at firstname.lastname@example.org or 021 890 850.
What has the weather got to do with our mortgages?
For over 5 years, most of us have heard Economists saying that we are in a house price bubble which is expected to burst at some stage. Deutsche Bank estimates the overall NZ house prices to be 30% overpriced relative to income, with Auckland presumably being worse. Auckland is rated to be among the top 10 least affordable cities in the world to live in. Then we hear that for the first time, annual net migration has passed over 60,000 in August 2015 (mainly from India, then China). We hear that the easing of the Chinese privately held capital policy should bring in an additional US$10.9bn invested in NZ property. We read of an Auckland home being sold for $500,000 more than it was bought for 4 months previously and without any work done on it. We see that it is becoming slightly more difficult for property investors buying in Auckland, and slightly more difficult for potential home owners to get lending for over 80% LVR (Loan-to-Value Ratio).
Just when we have decided which side of the fence we sit, Graeme Wheeler decreases the OCR (Official Cash Rate) further, banks respond by reducing their interest rates, so allowing borrowers to borrow more, increasing inflationary pressures. And then he tells us that future OCR movements may be dependent upon our weather this summer. Yes, you read it correctly, the weather! You see, the El Nino weather conditions forecast is for a very warm and dry summer, leading to droughts, which would lead to further OCR decreases to ease fiscal pressures.
Through all of the noise around us, calm clear heads need to prevail. For most of us, we need to take a strategic view of our borrowing, with a longer-term focus that prepares us adequately for future fluctuations. If too much of our borrowing is fixed for a certain point in the future, and at that point in time the interest rates fluctuate significantly, it can have a major impact on our standard of living.
For example, if your interest-only $500k fixed loan came up for review and the rates changed by 1% (say, from 4.35% to 5.35%), the impact of that increase would equate to about $100 per week less for your family. What would you cut back on? What would your client cut back on? However, if it was only $100k that came up for review at that time, it would only be $20 less per week. A longer-term view would smooth out the impact of any given year’s changes.
So don’t let the weather dictate whether or not you will be okay in the future. Now is the ideal time to take a strategic approach to your borrowing and structure your loans appropriately. And the same holds true for your clients.