In 2013 the Reserve Bank introduced LVR restrictions to curb a potential overheating of the property market. As a rule, owner occupiers needed a 20% deposit and investors 40%, later reduced to 30%. There was some leeway with banks able to lend a very small amount with lower deposits.
All restrictions have been removed which basically puts lending back to where it was prior to 2013. The Reserve Bank’s reasoning is based on stimulating home ownership whilst mitigating any potential fallout if property prices fall, which in our view is a remote possibility.
The Reserve Bank will review in 12 months, so expect some form of restriction coming back at that time.
For first home buyers, 10% deposit will become the new norm, albeit for quality applications only. The LVR changes do not make a marginal application any better. Banks will be cautious at high LVR as they are now and also have to abide by The Responsible Lending Code which is all around not putting customers at financial risk.
The real winners, in our opinion, are Property Investors. The 30% deposit requirement will reduce to 20%, as 80% loan to value (LVR) is a Lenders sweet spot. With 20% equity a customer is going to fight to keep their property in the event of hardship (or sell it!). The Bank is at minimal risk in the event of a downturn. Those of us who remember the GFC, saw some suburbs in Auckland drop by 14% at worst and then rebound within two years.
Another reason for the decision is to protect Banks and Customers in the event of hardship, where the loan goes from under 80% to over. Under the previous restrictions, this could have caused regulatory issues, so the Reserve Bank have taken that risk away.
Will the flood gates open?
Just because you can do something doesn’t mean you will.
This applies to lending in a big way. All Lenders will be considering how to adapt to the new rules, but in the main they will simply revert to what was in place prior to 2013. In the current climate of Covid 19, we simply don’t know what the coming months will look like. Credit criteria will tighten, meaning more high LVR applications will be declined leaving more money available for quality applications. This includes property types too, so small apartments, tiny houses and bare land will see no change in lending.
Low equity premiums/fees?
These were already in place prior to 2013 and so we see no change here.
If you are borrowing over 80%, the risk to the Lender is higher and so they charge accordingly. These charges take two forms; one is a margin on the interest rate and the other is a one off fee.
No change here as these were exempt from the restrictions.
The Reserve Bank wanted to encourage new construction and promote higher quality living accommodation. For Property Investors 90% has always been possible for new build and for first home buyers 95%, subject to very strict criteria.
The net effect
Positive in our view.
For first home buyers who have demonstrated a good financial discipline, there will be more opportunity to get into the housing market.
For Property Investors lower deposits mean more purchases, which in turn gives renters greater choice. New Zealand is a free Country but we can’t live on the beach, so these changes will see property ownership increase, which in our view can only be a good thing.
As always we are happy to answer any questions. Email email@example.com or call 0800 LENDER (536337)
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