From January, the Reserve Bank of New Zealand loosened LVR restrictions on banks trading in New Zealand. LVR is essentially the amount a bank is allowed (under Reserve Bank rules) to lend against the value or purchase price of a property.
To try and slow the everstrong NZ property market, the Reserve Bank had put limitations on the banks some years ago. These were enforced up to 2017, allowing the banks to only lend to 10% of their portfolio if clients have less than a 20% deposit for an owner occupied property. If that sounds tough, they then imposed a massive 40% deposit restriction for investment properties to be paid in cash or equity from another supporting property.
The changes that came into effect early this year have increased the threshold for banks, who can now lend up to 90% to owner occupiers. Under new rules, this has meant banks are able to have this group make up to 15% of their portfolio. While that may not sound like much, it increases bank lending by 50%, almost taking them back to their capacity before the restrictions, where lending up to 90% used to be the norm.
Changes to investment lending have also taken place, with a decrease in the required deposit or equity from another property down to 35% of the purchase price. Whilst this is still harsh, as a Loan Market adviser, I have exclusive access to non-bank funding, allowing investors to buy rental property with only a 20% deposit or equity from another property. This new non-bank product is available now.
So will this available funding have any impact on interest rates?
While not directly linked to available funding, interest rates could be impacted if this funding pushes housing inflation up. The majority of lending in New Zealand is sitting on fixed interest rates funded through overseas markets (predominantly USA & Europe), our interest rates can be linked to the growth and recovery of these markets, which we are starting to see today.
All this means is there may finally be some upward interest rate pressure in 2018, but the impact of this will be minimal with current interest rates expected to remain low throughout the first half of the year. Any potential increases are forecasted to be small and towards the back end of the year.
In conclusion, it’s a good news story from our end, with all of these changes collectively equating to more available funding in 2018 for your clients, which will in turn lubricate the property market for buyers and vendors alike. If you have any further questions on these changes, please don’t hesitate to contact a Loan Market adviser.
How to buy a new home before selling. Bridging finance explained.
Many of your clients will need to sell their existing home to purchase a new one so it helps to understand their finance options. The sale of a property doesn’t always align with the purchase of a new property so I often use a bridging loan to ease financial strain during the transition.
A bridging home loan, also referred to as a relocation home loan, bridges the financial gap between having to pay for a new property and receiving the proceeds from the sale of an existing one. Bridging loans can also provide finance to build a new home while the owner lives in their current home.
How does a bridging loan work?
Generally the lender will take security over both properties and lends against these properties until the sale and purchase process for both is complete. The bridging amount or ‘peak debt’ is restricted to no more than 80% on the first property and 65% on the second and, like any loan product, it pays to have a mortgage adviser who will shop around. Rates are often slightly higher than standard home loans however bridging or relocation loans are shorter term, generally offering a solution for no longer than 12 months.
This will result in a slightly higher home loan for the new property but can reduce financial stress during the transition period. When the existing property is sold, the proceeds from the sale are taken off the balance of the bridging loan, and the remainder will form the new home loan.
Is a bridging loan the right move?
There are a number of factors I consider when determining if a bridging loan is suitable for a client. One important consideration is how long the funds are expected to be needed for. This requires factoring in how motivated the client is to sell the property and if they’re looking to buy an established property or build a new one. It’s important that the borrower is aware that the longer the bridging loan is required for, the more interest they will be paying.
It’s also important that borrowers understand the demand in their property market and how much the existing property will realistically sell for. I will work with them to ensure that both the bridging loan works for them in the short term and the new home loan suits their medium to long term needs.
Source; Loan Market – Peter Dawber and Sifa Sifakula ~ https://www.loanmarket.co.nz/southern-corridor/our-team