How responsible lending may affect property investors

February was a bit of fun for Mortgage Brokers and Bankers alike. The Hayne Report was released in Australia and brought about some stern recommendations for the lending sector. It’s something that’s been in the limelight for a number of months but the release of the report really brought it to the forefront of people’s minds.

Pondering this and speaking to a number of clients, I felt it is a good time to talk a little about New Zealand’s Responsible Lending standards and what this might mean for a property investor.

What’s important to consider throughout is that these standards have been put in place for the best interests of New Zealanders. However, like anything that is done by the government, they can often carry unforeseen circumstances.

Borrowing More

Not long ago it was pretty simple to gear your assets up further. More or less a bank just wanted to know that there was a slim risk of loss (asset prices were going up, what was the worry?!) and that you could service the debts as they stood.

Now however, the banks require a lot more information and complete extensive due diligence. Not only have there been ‘speed bumps’ put in place in the format of LVR restrictions (lessened now to 70%) but also a focus on many other aspects;

• Purpose: why are you borrowing the funds? This is where the government determines if the funds are being used as a method to launder cash.
• Account Conduct: banks now scrutinise bank statements very closely, searching for hidden debts, lavish expenses and even gambling habits. If something is amiss you may miss out on that loan.
• Value of the property: banks now in most cases require you to get an updated valuation on the property you are purchasing. They also dictate who that valuer must be – a result of some crooked operators inflating asset prices to appease lenders.
• Serviceability: banks are now very focussed on your capacity to service debts in the event of a seismic shift in the lending landscape. Sensitised interest rates are the norm now and sit 2% above the current carded market floating rate. The current carded market floating rate itself usually sits about 0.75 – 1.0% above the real rate most borrowers achieve. This means banks are assessing loans at almost twice the rate they end up on.

Interest Only

Banks now often require a full assessment of your portfolio before rolling any loans onto interest only. The banks are required to ensure that over the remaining term of the loans, that you have the capacity to repay the debt. Often this means that people are required to move onto Principal and Interest terms for their loans and this can result in some really tough decisions for investors.

Some properties become no longer tenable for some investors as they cannot afford the additional payments associated with principal. This can result in semi enforced sales, refinances and rethinking from investors.

Some investors are being left in quite a predicament having acquired and grown their portfolios during a time of different credit criteria and now finding their portfolio doesn’t fit the new norm. I recommend to anyone with a medium to large size residential portfolio to engage a broker or adviser and start forward thinking about the next 5 years. Get ahead of these discussions.

Interest Rates & Terms

I mentioned above the interest rate sensitivity that banks are now applying for the assessment of mortgages. What’s also happening now is a higher cost to investment property. RBNZ standards now require banks to classify residential investors (if a client has more than a certain number of properties, usually 3-4) as ‘Active Investors’ which classes their debts as a form of business debt. This carries with it an increased capital allocation for a Bank and therefore a higher cost to them. As always, this is passed through to the investor in the form of margins on housing interest rates.

Presently these are reasonably minor (0.10 – 0.20% on most occasions) however it is an impact on the market and something that could increase going forward.

The above are just some of the impacts that Responsible Lending Standards and the revised culture of banks have had on the market. As I mentioned earlier, this has all been done with the kiwi’s best interest at heart but is often misunderstood & can have unforeseen circumstances (intrigued to see sales information from those who cannot afford P&I).

When you couple this with the Hayne Report and what outcomes that could have, the proposed new capital ratios for banks (final submissions due in March) and the current uncertainty in the property market, it is certainly an interesting time for investors and developers alike. My recommendation? Get yourself alongside an adviser (whether mortgage or financial) and plan ahead.

You can also use our mortgage calculators to estimate how much you can borrow and what your repayments would be. Speak to a mortgage broker Hamilton today.

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