The Reserve Bank New Zealand (RBNZ) removing Loan to Value Ratio (LVR) restrictions can only be a good thing, right? That’s a good question. I’m up in the air about it but mainly because I don’t think the impact will be as significant as what it seems. I’m actually not against the rules. I think they’ve served their purpose and coupled with bank credit policy have helped ensure that borrowers aren’t getting themselves into more debt than they can afford. Or maybe it’s just that I’ve become so accustomed to the rules that it seems strange to think of not having them.
What are the restrictions?
LVR restrictions were introduced as a macro-prudential financial stability tool in October 2013. In really simple terms, they initially started with the requirement for investors to have a 40% deposit and first home buyers to have 20%. Important to note is that new builds have always been kept separate, meaning that if you were buying a new property you were exempt from those rules. Further changes have been made to these rules over the last 5 years which have left us in the position we are today which is that investors need 30% and first home buyers need 20% - although a much larger portion of first home buyers can get lending with less than 20% deposit. Again, new builds have been exempt.
Will this affect borrowers?
Easy answer is yes. However, before you get too excited about LVR restrictions being removed and assume that it means you can buy with low (or no) deposit, think again. Remember what I said in the opening paragraph. It was both the LVR restrictions and bank credit policy that steadied the housing market and prevented people from borrowing too much. Removing LVR restrictions does not in itself mean bank credit policy will loosen. In fact, I’d be surprised if it didn’t go the other way in the short term.
I was chatting to a banker the other day having a joke about the fact that coming out of the GFC you could buy 4 properties at 90% LVR from one bank and that bank wouldn’t even look at your other bank lending. Test rates weren’t really a thing. Banks looked at your actual interest costs and if you could afford more lending then happy days! Will we end up there again? Not a chance.
Test rates currently sit at around 7% at each bank and they’ve stayed that high despite actual borrowing rates coming down. They’ve stayed there because whilst it protects the bank, it protects the borrower as well. Pre these test rates, home owners were borrowing 9 or 10 times income and house prices were flying up at a rate that simply wasn’t sustainable. With these test rates we’ve scaled back that borrowing to circa 5 or 6 times income which seems high but is a lot more realistic. A reduction in the test rate would have a bigger impact for borrowers than removing LVR restrictions.
Covid-19
Removing LVR restrictions will help existing borrowers navigate potential tough times as a result of Covid-19. It will mean banks are less restricted when approving things like interest only and repayment holidays when property prices are potentially falling.
If existing borrowers have access to more of their properties equity then they have more options. Business owners can leverage equity to assist with lower revenue. Home owners can leverage that equity to help if they’ve had a loss of income and struggle to meet repayments. It will also help investors to access cash if they’ve had tenants stop paying.
Giving the banks more freedom to help borrowers is a big tick.
First Home Buyers
LVR restrictions being removed simply means that the banks won’t have the same external controls – set by the RBNZ – around how much deposit buyers need. It, however, doesn’t mean they won’t maintain the same internal controls (which by the way have been far harder to navigate than the external ones). Such as, needing 5% genuine savings or evidencing your ability to meet the new mortgage payments.
The Responsible Lending Code was brought into full effect in 2015 and these are what forced those credit policies that I spoke about earlier. These are also what will prevent these LVR changes having too much of an impact.
What it will do is bring more buyers into the market at a time where consumer confidence is unsurprisingly low. It will open the door to more first home buyers getting on the property ladder and that’s a great outcome. If property prices come back 10% and your smaller deposit is now enough to get you a house, then that’s a good thing. This will lessen the impact of buyers Kiwi Saver balances taking a bit of a hammering in recent times and it will help to keep the market ticking over. Win/win/win.
Investors
For investors, similar sentiments to the above apply. Credit policy will restrict the impact that this change has for you. Given the LVR rules have been around for so long, the reality is almost all investors will be below 70% LVR anyway. However, what it will do is give you access to equity you may not have had or more than you thought you had. This is great. If you can get around the bank servicing criteria, then you’ll be in a position where you can leverage more equity to take advantage of a potential downturn in the market. It’s a good opportunity to set yourself up.
My advice here would be to not get over excited and buy something you shouldn’t.
New Builds
This is where we may see a change. New builds have always been exempt from the LVR restrictions which means you could buy them as an investor or a first home buyer without deposit restrictions. This has helped drive an affection towards buying new rather than second hand and in a country with a rather large shortfall in supply, this has been welcomed.
That shortfall isn’t going anywhere, so my hope is that the affection continues even without LVR restrictions. Encouraging new builds isn’t a bad thing for a number of reasons!
In summary:
This could have come across as a negative article. It wasn’t meant to. I’m an optimistic person and I’ve tried to take a more realistic approach to what these changes will mean. They’re good changes and anything that helps first home buyers get into the market is fantastic. Boosting confidence right now is what we need, and this will help to do that. As an investor, I’d be happy and excited at what I can do next. As an existing borrower I’d sleep a little easier knowing I might have a few more options.
If you’ve got questions about how these changes will affect you and your next buying move then get in touch.
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