Podcast: Important Update: BNZ Announces Sweeping Changes to Lending Policies Making It Harder to Get Lending | Ep. 249

Posted by Ed McKnight on 19/05/20
BNZ Announces Sweeping Changes to Lending Policies 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss the BNZ's recently announced changes to its lending policy. These policies govern how much the retail bank is willing to lend on different property types.

Most interesting for property investors, the bank will only lend a maximum of 70% of a property's value for any investment property. This includes any properties that would have been exempt under the previous LVR rules, like new builds and the dollar for dollar exemption. This will make it more expensive and challenging for investors to purchase a property if using BNZ.

Similarly, any flatmate and boarder income is not being used to calculate a borrower's servicing ability. That means that marginal borrowers who needed additional income to pass the bank's lending tests will now struggle to meet the minimum requirements.

We wrap up the episode by discussing our upcoming property investment webinar. You can sign up to attend by clicking the link above.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host, Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about how easy is it to get money out of the banks. That's the theme, but we're specifically going to be talking about a recent change in BNZ's credit policy.

So, what they're willing to lend money on and how much.

Now this change in policy only just came out yesterday. Andrew had it in his inbox and it's been forwarded on to us by another mortgage broker as well, and BNZ have introduced some quite sweeping changes to what they're going to lend money on.

Over the last couple of weeks, obviously we've seen the Reserve Bank take away the LVR restrictions and remove them from the market, but if you remember correctly, what we said was that it would all come down to what banks were actually willing to lend money on for what and how much for each of the different kind of investment types.

And BNZ has come out with some really interesting and game changing policies that's actually going to make it significantly harder to get lending for some specific people and some specific borrowers. So Andrew, give us a summary of some of these policy changes because they are massive.

Andrew Nicol: They're significant. So, the first one, income for flatmates and boarders. So if you apply for a loan and you've got a flatmate and boarder that you put in your servicing calculation, this is no longer going to be used for servicing.

They may consider it as a mitigant so they might look at it and say, okay, well you've got a low servicing pass, but you've got the ability to have a boarder.

But they're not using it in servicing calculations per se. And so if you rely on boarder or flatmate income, you're not going to be able to do that with BNZ.

Second one, which this one doesn't come as such a shock to me. So income from Airbnb or short term rentals, no longer included in servicing calculations.

So this is just a reflection of the fact that we expect that that market is going to take a bit of a hiding over the next wee while, so if you've got a property that you have rented out as Airbnb or short term rentals, you will not be able to use this in servicing.

You have to be able to service your existing and your new lending, without any of that income. Lease hold properties, so if you've got a lease hold property that you're looking at buying or you own, basically they will only consider them where the remaining term on the lease exceeds 50 years and as completely at the bank's discretion. So you can't expect to get much of an LVR against that.

One of the major ones investor lending. So, as you all probably know, the Reserve Bank has taken away the LVR exemptions, which allow people now to go up to 80% or higher if it's owner occupier.

BNZ have said they will not do any more than 70% on anything, including properties which are exempt, i.e. new builds.

So even if you're building a new property, you will only be able to go to 70% on that now, which is crazy because that was under the exemption.

So if you'd bought pre lockdown, you could have borrowed more than now, even with the Reserve Bank, easing those restrictions. New to bank lending, so if you're new to bank lending and you're looking at a construction, the maximum LVR is 65%.

So that's quite huge as well, because for anyone that's looking at taking BNZ as their split banking option, and you don't bank there already, you're only going to be able to go to 65%, which is quite low, and new to bank customer seeking apartment lending can only go to 65% whether it's owner occupied or investment, and they haven't actually put provisions around the size of the apartment.

So even if you've got a hundred square metre apartment where normally you could go to 80% that's now dropped to 65%. And they've also put some criteria around whether or not you're existing or new, they'll consider that and by live, what that means is you've got a signed sale and purchase agreement, or there's a auction pack ready to go.

Pre-approvals they'll look at those again, if it's live. If you're looking for an over 80%, cause those are up to 80%, if you're looking at over 80% LVR live application. So if you're an owner occupier and you've signed a sale and purchase agreement, it is very limited that they will even consider looking at that.

And if you're over LVR pre-approvals, again, very limited, but if you're new to bank, absolutely not. So if you're looking to it for a pre-approval with BNZ, and your first home buyer, and you want to go to 90%, you don't stand a chance getting pre-approval, which is very tight criteria and just shows how cautious the BNZ in particular be right now.

Ed McKnight: And what I do want to say is I just want to pick up on two of them that are probably most important for what we've talked about previously on this podcast.

So the first is income from flatmates and boarders. So if you remember, or you'd come along to one of Andrew's webinars where we talked about how to get more money from the bank if you're tight on servicing.

So, you don't necessarily have enough income and the bank's eyes in order to be able to take on new lending for an investment property.

One of the strategies that we use is to get a boarder or a flatmate, if possible, and if it's appropriate for you in order to be able to have that extra income. So you're able to get the lending for an investment property.

They're saying you're not able to do that anymore. So that takes away one of those strategies that you would otherwise be able to use. And I realise that some banks actually only ever considered flatmate or boarder income up to 50% for instance, you know, so there is a bit of change there for BNZ if they, depending on how much they had considered previously.

But the other thing I want to mention as well is that is going to hurt first home buyers in particular. So if you're a single person who is purchasing your first home.

It can be hard sometimes to have enough income to get the lending for your first home. So one strategy frequently that we see is to get a couple of flatmates and to make up for that serviceability.

So again, that's really going to hurt the people who don't already own properties in that situation. There's only a couple of investors who would probably actually go ahead and use the flatmate and boarder income strategy, if needed, and if they were kind of on that precipice of getting lending or not.

The other one that's really interesting is that investor lending at 70%. Now, obviously there is the new build exemption that we've kind of already talked about, because that's a major one and obviously impacts a lot of investors who were investing in new properties because they tend to get that high return on equity.

However, it also impacts the ability to split bank because under the previous exemptions, you could move all of your lending, you know, there was the dollar for dollar exemption where you could move bank lending from one bank to another.

Well, if they're were only leading up to 70% on properties when you do that, that is going to negatively impact your ability to split bank and then increase your equity, which is one of the other strategies that we often use for property investors when you're wanting to free up more equity so you can go and purchase more properties.

So what this says to me is that Andrew, sorry, not Andrew, I was reading my email, sorry, Andrew,

I mean BNZ is kind of going out on a limb in this case, by tightening their credit policies, and it potentially either means that more business is going to go to other banks, and we're going to start to use other banks. And this really shows the, the need to split bank and to work with multiple banks in this case.

But it also makes me wonder about BNZ existing book, because this tells me that they're looking to de-risk their kind of lending book and it does make me wonder, you know, have they overshot the mark in terms of the amount of risk that's already within their book?

I'm not sure if you have any comment on that, Andrew, as a former banker yourself.

Andrew Nicol: Well, one thing to remember about BNZ is they're currently for sale and so they are being particularly cautious because the better their book, the better the money they get when they do sell it.

So I don't imagine other banks are going to follow suit, certainly to this level, particularly when they've got the ability to lend a lot more than they used to and they need to, they need to bump up their profits for their shareholders.

So don't expect this to be a blanket policy for all the banks in the coming months, but it is just interesting that BNZ the taking such a particularly cautious approach.

Ed McKnight: Particularly when we saw Kiwi bank come out and loosen their lending policy, or come out with a statement after the LVR changes had been taken away.

The LVR restrictions had been loosened by the Reserve Bank, saying that they were looking at higher LVR lending, particularly for owner occupiers.

Now the other thing that I do want to mention is that this is kind of the exact opposite of what the Reserve Bank governor, Adrian Orr came out and said he wanted to see, obviously he's been encouraging banks to lend money to credit worthy borrowers.

And, he didn't want banks to tighten their credit policies. That's why they're pumping the economy with the large scale asset purchasing program, flushing money into the economy.

That's why they've cut the official cash rate as well, and he's doing a lot of jawboning so, you know, talking about what they want to see out in the market, they want to see more lending being given to credit worthy borrowers. And we're seeing the opposite of that in this case.

So what we may see in future, and this is already being signalled by the reserve bank, is negative interest rates or negative official cash rate.

Now, remember, the official cash rate is probably one of the most misunderstood monetary policy instruments. So what, you know, the things that the Reserve Bank can actually do, because what it impacts is the amount that a bank gets as a return or the amount that a bank pays for taking money overnight from the Reserve Bank and using it as very short term liquidity.

But what it does as soon as we see interest rates go negative is that there is no benefit to, for any of the commercial banks in placing money overnight at the Reserve Bank because they would lose money in that case.

Now that means that they've either got to keep it on hand or they have to go out and use it.

They have to go out and actually lend it to people, especially if they want to get some sort of positive return on equity, which share holders are looking for.

So if we do see a dip into negative official cash rate, we probably will see banks being encouraged to lend even more to credit worthy borrowers.

And so we may start to see that come out from the Reserve Bank. If we see other banks, commercial banks following down BNZ its pathway, because this is exactly what the Reserve Bank doesn't want to see. They want to see more stimulus come into the economy.

And so it is interesting that we are seeing this now, Andrew, in terms of actual borrowers and investors, is it safe to say that we're probably going to be steering away from BNZ at the moment?

Andrew Nicol: Absolutely. I'd say unless you're an existing client, you're probably not going to go to BNZ right now. But there's plenty of other banks out there.

And this again, is one of the reasons why we stress split banking. If you've got all your portfolio tied up with BNZ, and you go to apply for new lending against your existing portfolio, you're not going to be seeing much, which is quite a shame for me because I've got a lot of lending with BNZ and a lot of properties at the moment, so I need to try and spread some of those out.

But they've run out of banks for me. So, I do think it's really important that you take advantage if you're going to build a portfolio of the current criteria of being able to lend a higher percentage BNZ's is not going to be the bank for most of our clients.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate, review and subscribe to the podcast.

It really does help us get the message out to more people and hey, if you want to learn more about property with Andrew and I, why not come along to our final weekly webinar, which is happening this Tuesday at 7:00 PM where Andrew's going to talk about what he's learned from owning 38 investment properties and how he manages to keep a handle of it all.

I'm going to link to that webinar in the show notes, so tap or swipe over that cover art, it'll take you right there.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of New Zealand property market.

Until next time.