New nationwide LVR restrictions announced
Significant changes are afoot in the investment lending space, with the Reserve Bank of New Zealand (RBNZ) last week releasing a consultation paper flagging upcoming changes to loan-to-value (LVR) ratios.
Residential mortgages make up 55 per cent of all assets in the banking system. This level of exposure presents a risk to financial stability. RBNZ Governor, Graeme Wheeler, said, “A severe fall in house prices could have major implications for the functioning of the banking system and cause long-lasting damage to households and the broader economy.”
Investment lending is increasing rapidly, contributing to the strength of the market. But with this type of lending comes higher risk, and the proposed restrictions are a direct reflection of the need to lessen that exposure.
There are three key changes coming into effect from 1 September, 2016.
- No more than 5 percent of bank lending to residential property investors across New Zealand will be permitted with an LVR of greater than 60 percent (i.e. a deposit of less than 40 percent).
- No more than 10 percent of lending to owner-occupiers across New Zealand will be permitted with an LVR of greater than 80 percent (i.e. a deposit of less than 20 percent).
- Loans exempt from the existing LVR restrictions, including loans to construct new dwellings and dollar for dollar refinances, will continue to be exempt.
Governor Wheeler also said, “LVR restrictions to date have improved the resilience of bank balance sheets by reducing banks’ exposure to riskier mortgages. This policy initiative is intended to further improve the resilience of bank balance sheets, and it will assist in restraining credit and housing demand.”
The banks were urged by the RBNZ to implement these changes early with pretty much all having incorporated the new regulations for new loan applications.
Options are still open
It’s worth noting these LVR changes are directed at registered banks only. As a mortgage adviser, we have access to New Zealand’s widest range of non-bank lenders and finance companies who aren’t affected by these changes. While the interest rates may not be as sharp as the banks in the 4% range, many are in the 5%’s. There may also be opportunities for “dollar for dollar refinances’, which are exempt from Reserve Bank restrictions - these loans may even be refinanced back into mainstream banks in the future.
We’ve identified a potential issue for vendors selling investment or owner occupied property, who may be retaining other investment properties. The banks could demand the funds from this type of sale be used to reduce debt on the remaining properties to the new LVR’s, sucking much-needed cash from the vendor, which could otherwise be put into new property.
In the future, if the house they’re selling isn’t their sole property, it’s critical all potential vendors are referred to your Loan Market adviser for advice.
If your clients have questions about current or future loan applications,
please share my details. I’m up to date with the incoming regulations and happy
to answer questions for you and your clients.