It’s been three weeks since the Reserve Bank of New Zealand removed the loan-to-value-ratio (LVR) funding restrictions and banks are now technically allowed to lend as much as they like over 80 percent. So has the change had an impact on how the banks are dealing with home loan applicants?
Before going too far into this subject, it’s worth knowing two key points around the removal of the LVR restrictions that haven’t been focused on a lot:
• The main reason the LVR restrictions were removed was so that the large number of mortgage deferrals, colloquially called “mortgage holidays”, didn’t cause the banks to breach the Reserve Bank rules. If, for example, a lot of mortgages went from 78 percent to 81 percent LVR because of the mortgage holidays, the banks would be at risk of serious repercussions from the Reserve Bank. The ability for new home buyers to purchase with less than 20 percent deposit was a side effect of this rule change, not the main purpose.
• Banks have their own internal risk-management and policy teams who decide what their lending criteria will be, regardless of what they are allowed to lend. This can be best summed up by remembering that, just because a bank can lend over 80 percent, doesn’t mean they will.
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You may be able to see where this is going. Despite all banks now being able to lend over 80 percent to any high-quality applicant, we’ve seen almost no announcements from the banks showing increased appetites. The communications have, in fact, ranged from a “waiting to see” attitude right through to “aggressively pessimistic”.
Last week, for example, one of the main banks announced a list of policy changes that included a maximum borrowing of 70 percent for investment properties. This is the same as before however that limit now includes newly constructed properties which were previously welcomed at 80 percent for investment properties. In other words, that bank has made the LVR rules harder, not easier, for investment properties. This same bank is not currently allowing any sort of flatmate income to be taken into account. The buyer’s income must support the mortgage without any outside help.
Even the most optimistic banks are waiting to see how the property market performs over the next few months but to expect a bank to willingly lend up to, say 95 percent, when their economists are forecasting a drop in the market of around 10 percent is unrealistic.
This situation won’t last forever though. Policies are regularly reviewed and banks are, after all, profit-seeking companies so expect these policies to change as soon as banks are more comfortable with how the economy is tracking.
In summary, after three weeks, the banks have not shown a desire to increase lending to low deposit (high LVR) buyers while they wait for the repercussions of Level 4 lockdown on the property market and unemployment. Buyers who are currently applying for mortgages should expect to play by almost the same rules as prior to the LVR - ie a larger deposit is still better and proving your income is paramount.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer
