The start date for the new loan-to-value ratio (LVR) limits has now been pushed back by the Reserve Bank, following consultation with a number of leading institutions. Rather than starting on 1 September of this year, the limits are planned to take official effect on 1 October. Could your property investment strategy be affected?
Limiting the field
It is investors that are more heavily hit.
The New Zealand investment scene has had to work with loan-to-value limits for a number of years now, being unable to borrow more than 70 per cent of the value of a home if purchasing in Auckland. Originally put in place to try and curb investor activity in the City of Sails, the LVR speed limits created little more than a blip on the radar for Auckland property prices. The market quickly recovered as people learned to work with the restrictions.
However, these new limits have some more far-reaching effects, stretching beyond the bounds of Auckland and affecting the entire country. Meanwhile, owner-occupiers are also set to feel the sting as they are required to provide a 20 per cent deposit: Almost $200,000 for the median home in Auckland, according to QV figures.
It is investors that are more heavily hit, however, as they would need to provide $400,000 for that same house – hardly a small sum, even for those with significant portfolios.
Why the delay?
The purpose of the limits was, in a roundabout way, to reduce the ever-increasing value of Auckland property: The rocket-powered growth that has been a significant boon for anyone with real estate in or even around the city. However, the most recent round of adjustments would require a massive undertaking from the banks; and while many of them have already implemented the LVR restrictions ahead of time for new loans, each major bank still has a raft of loan pre-approvals which were made before the new limits were even announced.
For example, in June (the month preceding the announcement date), the Reserve Bank records that there were over 33,500 loan approvals – many of which would have been affected by the new restrictions. In order to curb the damage to their clients and the business, these banks have appealed to the Reserve Bank to delay the official start date so that they have time to follow through with pre-approvals to current mortgagees.
Are you affected?
This delay, though it is only a short time in the grand scheme of things, gives investors a little bit more leeway in organising how they are going to reframe their investment strategy in this new environment. There is still room for investment, but you have to be a little more clever about it.
Exemptions to the LVR limits exist for new dwellings, so off-the-plan purchases may be an option. Meanwhile, refinancing an existing high LVR loan could work, or using a combination of your current home and the proposed investment property. Lastly, the banks are not the only lenders in town: Many non-bank lenders may be good supporters of your investment strategy.
Whatever your intentions, it's best to get the right advice to ensure that you are working as well as you can with the upcoming changes. You might have a little more time, but that doesn't mean you should be delaying in talking to a financial adviser.
Here's to your financial independence!
Authorised Financial Adviser / Investment Property Expert
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