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Responsible Lending Impact

Ben Pauley explains what responsible lending practices currently are and what they could mean for you as a property investor.

By: Ben Pauley

1 March 2019

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. In light of this, it makes sense to talk about New Zealand’s Responsible Lending standards and what this might mean for a property investor.

It’s important to remember 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 and that you could service the debts as they stood.

Now however, the banks require far 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? The government determines if they’re being used as a method to launder cash.

Account conduct: banks now go through statements with a fine-tooth comb. If something is amiss you may miss out on that loan.

Value of the property: in most cases, banks require a valuation and will dictate who the valuer must be.

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 add that to floating rates sitting around 0.75 – 1.0% above the actual rate, banks are assessing loans at almost twice the rate they end up on.

Interest Only

Banks will often assess your portfolio before rolling any loans onto interest only. They’re required to ensure that over the remaining term of the loans, 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 which can result in some 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 five years. Get ahead of these discussions.

Interest Rates & Terms

In addition to the interest rate sensitivity mentioned above, 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.

The above are just some of the impacts that Responsible Lending Standards and the revised culture of banks have had on the market. As mentioned, this has been done with Kiwi’s best interest at heart but is often misunderstood and can have unforeseen circumstances (I’d be 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’s an interesting time for investors and developers alike. My recommendation? Get yourself alongside an adviser (whether mortgage or financial) and plan ahead.

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