Making The Most Of A Changing World
Embattled investors can look forward to the recent relaxation in LVR rules, writes Peter Norris.
15 June 2023
Winston Churchill once said, “A pessimist sees difficulty in every opportunity; an optimist sees opportunity in every difficulty”. There is always something valuable that can be derived out of difficulty, adversity or change. We just have to look for it with open minds.
Never has this been truer than over the last few years as we’ve all adapted to a changing world.
Changes are something that property investors have had to get pretty used to for some time now. Whether it be LVR changes, Healthy Home legislation, capital gains tax or interest deductibility, it would be fair for investors to feel they have been targeted.
However, the recent changes look to be a positive for investors with the relaxing of LVR rules meaning there’s more equity available in your existing properties.
What are the changes?
At time of writing the changes were still “proposed” but likely to take effect from June 1.
LVR rules have been a factor for investors to consider for a long time, since 2015 when they initially came in. Over the last few years the deposit requirement for investors has fluctuated from 30 per cent to 20 per cent and then out to 40 per cent in an attempt to cool the market during Covid.
As of June 1, equity requirement for investors will drop from 40 per cent to 35 per cent. What this essentially means is that when buying an existing investment property investors will only require a 35 per cent deposit. Or, when topping up against your existing investment properties, you can now get a further five per cent lending.
How does it work?
While on the face of it a five per cent shift appears small, it could be the difference between being able to buy an investment property or not. This is because if you own existing investments you actually get two benefits from this change: the equity release of your existing properties and the lower deposit requirement for the new property.
Let’s say you own two properties – your home plus one investment – and both were with one bank with total lending of $1,100,000 split as follows:
Home Value $1,000,000 Lending $700,000
Investment property Value $800,000 Lending $400,000
Formerly, in most cases the maximum you could borrow against your home was 80 per cent and 60 per cent against your existing investment. Based on the example, you’d have usable equity of $180,000. If you used this as a deposit for another investment property, then that would allow for a 40 per cent deposit on a $450,000 property.
However, under the new rules you can borrow 80 per cent against your own home and 65 per cent against the investment. This would lift the potential deposit you’d have, up to $220,000, and because you only need 35 per cent for the new property, you would now be able to buy for up to $628,000.
So, while the increase in LVR is only five per cent, the increase on your potential purchase power is close to 40 per cent.
As always (pretty much always), new build investment properties will remain exempt from the latest changes, meaning that the LVR rules do not apply. This means you only need a 20 per cent deposit rather than 35 per cent.
So, in the case of making a new build your next investment property, that $220,000 deposit would allow for a purchase price of $1,100,000.
This is, of course, in addition to the other benefits of new builds such as interest deductibility and short bright line.
The changes aren’t all directed at investors. The RBNZ has also adjusted the amount of a bank’s loan book to clients with “low deposits”. Low deposits means less than 20 per cent. Up until now, banks have been allowed to have 10 per cent of their total loan book made up of low deposit owner-occupiers.
This is part of the reason first home buyers have struggled for so long to get lending without a 20 per cent deposit.
That limit is going to be increased to 15 per cent, which means more of the book for borrowers with a low deposit. While I don’t believe this will suddenly make borrowing easier for first home buyers, we’ve already seen a couple of banks open their doors to new low deposit borrowers. This is a positive step for those looking to get on the property ladder.
While these changes aren’t huge, they do signal a shift in the right direction and the RBNZ is feeling more comfortable with where things are at. Understanding how these changes could impact your situation is the key to being able to make the right move. The simple reality is that change is inevitable in any market. At first glance, change can be frustrating or appear as though it’s not enough. However, there’s always a silver lining and those that see change as an opportunity and look for ways to use it to their advantage will continue to grow.