Most investors know at a high level What the changes are but do not know much Of the detail and how this affects them - Sandy Richardson

In the past year banks have spent much of their time adjusting to regulatory changes, as well as competing strongly for new business.

There’s been three key sets of regulatory changes. The most well-known are the loan-tovalue (LVR) restrictions imposed on banks by the Reserve Bank.

The second also comes from the Reserve Bank. When we did our survey a year ago their proposal was investors with five or more residential properties would have to be treated as commercial customers. The inference was interest rates would be higher and banks would require more equity in a loan. Fortunately, banks fought that proposal, the Reserve Bank acknowledged the “five-plus” rule wasn’t going to fly; rather it created a new asset class for banks.

The third change, which hasn’t had so much media attention, is the introduction earlier this year of Responsible Lending Guidelines. While these are not compulsory, they have forced all lenders to review how they assess loans. The key focus of the guidelines is that a lender has to be able to demonstrate how a borrower will repay their loan.

The findings of NZ Property Investor’s 2015 annual Lending Survey, which delves into bank’s lending practices, leave little doubt recent changes have made a big impact on the lending environment for investors.

Additionally, to better understand investor behaviour NZ Property Investor has conducted its 2015 Investor Survey. We reveal both surveys’ findings on how lending criteria has changed, what banks are offering and how investors feel about the lending environment. LVR exceptions

Over the past year, the biggest shake-up for investors has been the Reserve Bank’s new LVR restrictions. While most attention has focused on the 30% deposit required for Auckland investors, the Reserve Bank also eased the so-called “speed limit” for high LVR borrowing outside of Auckland. Previously banks could lend no more than 10% of their loans to customers with a deposit of 20% or less. It is now 15% for these low-equity loans in areas outside of Auckland. The speed limit for high LVR borrowing in Auckland remains at 10%.

Banks have rigorously adhered to this policy as the ultimate sanction imposed would be the removal of a banking licence; only Kiwibank has been close to breaching the restrictions. BNZ acting national manager, retail wealth Sandy Richardson says Auckland investors’ 30% deposit can include equity within an existing property. Although she says, "There are exemptions to this rule. These include new builds and remediation work for leaky homes.” Also exempt from the restrictions are Welcome Home Loans. LVRs - the nitty-gritty

The LVR maximums applied by banks may also depend on the number of properties an investor has in their portfolio. The location of properties can further complicate the equation as an Auckland property is weighted differently to its outside-of-Auckland counterpart.

This means there is some variety among banks when it comes to investor lending maximums. BNZ says it can lend 90% on the value of five properties, including the investor’s owner-occupied property. However, if there is an Auckland investment property held as security the maximum LVR is 70% for this property, and 80% for properties held outside of Auckland. ASB will usually lend up to 80% for those with up to four properties, subject to LVR restrictions and investor applications for loans of over 80% will be assessed on a caseby- case basis. ANZ says for investors with up to four properties, its LVR maximums depend on whether a property is in Auckland or not.

If it’s in Auckland, it’s 70% - unless it qualifies for an exemption. Out of Auckland, it provides some lending of up to 95% LVR, but more stringent credit assessment criteria applies for an LVR over 80%.

Both Westpac and The Co-Operative Bank have LVR maximums of 80% for those with up to four properties outside of Auckland, but 70% for Auckland properties. TSB will lend up to 75% to those with one to three properties. For those with four properties, it will lend 70%. SBS says it will lend up to 85% for those with up to four properties, subject to LVR restrictions.

There is a lot of regulatory stuff coming in so Investors have to come to terms with what that Means for them in the short to medium term - Glen Stephenson

What’s most important to borrowers?

It comes as little surprise the majority of property investors rate price as the most important element when it comes to selecting a lender.

Service is the next most important element, 20% of respondents saying they rate it highly. Interestingly enough it is also the area where banks fall down. While only 15% of respondents say they switched lenders in the past 12 months, the two most common reasons for moving were price and service.

Comparing pricing is difficult as all banks will offer rates below what they advertise and will often throw in incentives such as cash-back or contributions to legal fees. Although banks have advertised cash-backs heavily they are not a major driver in shifting.

When it comes to pricing there are some clear trends. Regularly the member-owned banks, particularly SBS and The Co-operative Bank, have the sharpest carded rates.

The larger banks tend to offer “specials” which are targeted at borrowers with at least 20% equity in a deal. The “specials” generally come with other conditions such as having wages or salary directly credited to that bank.

The biggest problem area for investors is serviceability. One-third of respondents named it as their main issue, ahead of interest rate/price.

This is an area which is likely to become more problematic following the introduction of the Responsible Lending Code. In the past, key criteria for banks was the percentage of gross rents they would use in their servicing calculations.

This year all banks have reassessed their servicing calculators. These now include considerations of living expenses, wages and salary, and other external income. One-third of investors have taken out a loan or refinanced since the code came into effect during the year.

Interest-only

A consistent finding is property investors tend to favour interest-only loans. In the Investor Survey 46% of respondents say their preferred structure is interest-only while 33% say it’s principal and interest (P&I). The balance use a combination of interest-only and P&I.

All the banks offer interest-only loans, although the terms differ quite widely. ASB, The Co-Operative Bank and SBS all have terms of up to five years. Westpac last month changed its policy and reduced the maximum interest-only term for Choices Home Loans from 30 years down to 15 years.

ANZ and BNZ offer terms of up to 10 years. However, Westpac and TSB don’t offer interest only loans if the LVR is over 80%. For LVRs under 80%, TSB offers one or three year terms again depending on the LVR.

Low-equity fees

Lenders will often charge either a fee or put a margin on low equity loans. Westpac says low equity margins are not applicable to investors as it doesn’t have investor loans over 80%.

ASB opts for a one-off low equity fee, at loan origination, rather than a low equity margin on interest rates. It applies from 80.01% LVR. ANZ also charges a low equity premium (LEP), at drawdown, once a loan exceeds 80% LVR. BNZ’s LEP margin is applied from 80.01% LVR. However, the level of this margin is subject to change.

TSB and The Co-Operative Bank both have LEP margins for LVRs in excess of 80% and both review the margins when the LVR drops below 80%. SBS doesn’t have a low equity fee or margin for floating interest rates, but it does apply a margin to fixed rates when the LVR is over 80%.

Raising a deposit from another bank:
Most of the banks indicate it is possible for a borrower to raise a deposit from another bank, although such applications will be assessed on a case-by-case basis. As long as the Reserve Bank limits are observed, it will depend on the borrower’s circumstances and total servicing position.

However, both ANZ and TSB emphasise that if it is an attempt to get around LVR restrictions, particularly in regards to Auckland, it will not be possible. Investor help at hand The new lending environment is complicated –