20% home deposit rules axed: What it means for you

The Reserve Bank of New Zealand has decided to remove the loan-to-value-ratio restrictions on mortgage lending. The rules were first introduced in October 2013 and, in their most recent form, stopped banks from lending more than 20 percent of their residential mortgage book to owner-occupiers who didn't have at least a 20 percent deposit and from lending more than 5 percent of their book to investors who didn't have a 30 per cent deposit.

What has been announced?

From today, banks now have no restrictions on the amount of money that they can lend to high-loan-to-value-ratio borrowers. This was a strategic move by the Reserve Bank to stop any potential issues if house prices dropped and is also designed to bolster the economy and boost demand for property as New Zealand comes out of lockdown. The Reserve has stated, though, that it will review the current decision in 12 months.

What does this mean for first-home buyers?

If you are looking to buy your first home, your world just got significantly brighter. Let’s be clear, you will still need to be a credit-worthy applicant with enough income to meet the bank’s criteria. But up until now, you may have only been able to get pre-approval at your current bank. Most banks have been reluctant to give pre-approvals to non-bank clients in case that meant refusing pre-approval to existing clients.

But with the removal of LVR funding restrictions, banks should be able to lend money to any client that meets their income and credit requirements. For Kiwis, that means they will be able to choose the bank that best suits their circumstances, not the bank that has enough money to lend.

What does this mean for investment property buyers?

High-LVR lending comes with risks to the banks. Their main concern is being underwater if an owner stops paying their mortgage. If lending was to be allowed up to 95 percent and properties then dropped in value by 10 percent, the bank is the one that loses money.

As more and more properties are added to a portfolio, this risk gets larger for the banks. Until the banks get some sense of how the property market will look post-Covid-19, don’t expect a significant change to the LVR requirements for investment property. Banks are unlikely to lend over 70 percent on an investment property for quite some time. Only once they’re comfortable that the market has stabilised and isn’t going to drop significantly, will they likely increase this to the pre-2013 area of 80 percent for an investment property.

What does this mean for current home-owners?

In its statement announcing it was dropping the LVR requirements, the Reserve Bank clearly stated it didn’t want the banks to be stopped from extending hardship assistance to existing home-owners because of the LVR restrictions. It’s unlikely Kiwis will be able to apply for top-ups in the high LVR area for luxury purchases but if a loss of income or a decline of property values mean a mortgage is suddenly over 80 percent, the situation won't be as dire for either the mortgage holder or the bank as it was previously.

With the removal of high LVR restrictions, are we heading into the Wild West of lending?

The following statement will be the one to remember over the next few months: "Just because the banks can, doesn’t mean they will." That is to say, just because the banks can lend as much as they like on a property, it's unlikely they will open the floodgates. The rest of 2020 is going to be bumpy, economically speaking. Businesses may have to close, properties may have to be sold quickly to cover lost income.

This year will not be the time to turn up to the bank with an application to buy any of the following:

- Small apartments (less than 40-50sqm)

- Leaky or monoclad homes

- Leasehold properties

- Unconsented properties

- Uninsulated homes (don’t meet housing standards)

These properties will be coming to the market as people try to get some cash together, but banks are going to be even more negative about them than ever before. The banks are going to want high-quality securities (properties) backed by high-quality income earners.

What about new-builds?

The LVR funding restrictions didn’t apply to new-builds because the Reserve Bank wanted to encourage new construction and to get more Kiwis into higher-quality, healthier homes.

The fact still remains that new homes traditionally have more equity in them than existing properties. It’s going to be just as easy to finance existing homes but the huge benefits that come from buying new shouldn’t be overlooked.

Will Low Equity Fees and Low Equity Margins disappear for high LVR buyers?

Currently a mortgage of 80 percent (high LVR) or more attracts either a one-off fee at the time of settlement or additional interest on your mortgage. The likelihood of these disappearing is low. Banks take a huge risk on high-LVR mortgages and this needs to be compensated for. Don’t expect interest-only restrictions to be removed for the same reason. Despite popular myths, banks actually want you to pay down your mortgage so they can lend that money out to another person and spread their risk.

The removal of LVR funding restrictions is great news for financially secure first home buyers and gives them more choice of banks. In time, property investors will benefit too although it would be surprising to see this immediately. Applicants will still need to have good and, importantly, provably stable income. The property that they are buying will need to be high-quality.

- Rupert Gough is the founder and CEO of Mortgage Lab