Podcast: Recently Announced LVR Changes – What They Mean For Investors | Ep. 236

Posted by Ed McKnight on 07/05/20
Recently Announced LVR Changes What They Mean For Investors 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss the RBNZ's recently announced LVR changes and what they mean for property investors in New Zealand.

We also discuss what a high LVR loan means for borrowers in terms of additional costs. For instance, often when a borrower takes on the lending of more than 80% of the value of a property, they will either pay an upfront fee ... or a higher interest rate.

We also mention our upcoming property investment webinar, which will teach you how to create passive income through property investment.


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 LVR restrictions and the fact that the Reserve Bank of New Zealand has announced that the LVR restrictions will be repealed, that they won't be in place for at least for the next 12 months, and that that is effective as of the 1st of May.

So by the time this is released, it will have already have happened and LVR restrictions will have come off the market. But look, just before we get into what that actually means, how much will be passed through Andrew, how are you feeling about this decision from the Reserve Bank?

Andrew Nicol: So overall, it's pretty exciting Ed, because this is going to mean that more people are going to be able to borrow more money because you can do it with a lesser deposit and you can borrow more and create more usable equity against your existing properties. So, it's pretty exciting. It's going to mean that there's going to be a drive for the property market.

Ed McKnight: And I think it's important to realise as well what this means and what it doesn't mean. So I've seen around the internet, people asking questions like, does this mean that I'll be able to buy a property with no deposit? The answer's generally, no. We haven't seen no deposit loan. So to...

Andrew Nicol: Very unlikely.

Ed McKnight:...sorry to burst anybody's bubble, but actually I probably shouldn't say that given the current environment. What it does mean is that there will be a lot more flexibility from banks in terms of what they are able to lend.

And of course the Reserve Bank has taken back or reversed the decision or the implementation of LVRs because they want banks to be more aggressive than they otherwise would be in terms of their lending. They want banks to be encouraged to still lend to credit worthy borrowers in actual fact.

But what's really interesting and this is probably a common misconception, is that this doesn't necessarily mean that banks are going to start lending all at 80% all this means is that the restriction has been removed. Now, banks will still have internal LVRs internal loan to value ratios with their own determination of how much they will lend against certain types of properties.

But Andrew, you're very close to the mortgage market. What are you starting to hear about how banks are going to react and how perhaps they won't react?

Andrew Nicol: So, as of the timing of this recording it's a Monday, Nathan Miglani who's a good friend of mine and Christchurch broker, he put on a property investors chat group that Kiwi Bank had been the first bank to update their policy, given the LVR restrictions have been removed.

And now you can borrow up to 80% on an investment property, be it new or old in they're open to lending up to 95% on an owner occupier. Now, one thing, I actually was chatting to another broker as I was driving just before and Kiwi Bank are being one of the more challenging banks when it comes to income testing at the moment.

So for example, one of my clients, her company had received the government income grant under Covid19. And as a result, they were not willing to use any of her income for the servicing. Her husband luckily hadn't, so it still worked. It was really interesting to see that the government owned bank was discounting the entire income for the individual who earned an income from a company where they received the grant. So, yeah, one thing to be very aware of is that whilst banks have now got this new directive that they can lend a higher percentage, they're all still wanting to be relatively conservative.

And one thing to remember is this is a 12 month window. When we had the initial LVR restrictions put in place, there was a timeframe that banks had to get their book in line with what the new LVR restrictions involved. So you can imagine banks might be a little gun shy if in 12 months time the Reserve Banks says right, those rules apply again at 70% for rental and 80% for an owner occupier, and they've got to try and manipulate their book to get it to a point where people have got adequate equity to meet those criteria.

So don't expect that banks will automatically come out and say, right, free for all, you don't need any more than a 20% deposit for a house or, or 5% if you're going to live there. I imagine that will phase this in over time, and they will only do it for people who they think are very robust to be borrowing a higher percentage.

So part of that is if you want to borrow a higher than 80% LVR, they often look at what sort of income you're earning and make sure that you've got a really high servicing ability, and they might take that extra, let's say 15%, let's say an owner occupier borrows 95% they might take that 15% and amortize that over, say a five year period to ensure that you're getting below that 80% mark in a relatively short period of time.

Ed McKnight: And just to clarify as well, what Andrew means by that, when he says amortize that 15%, you're talking about paying that extra 15% of the loan down at a quicker rate in terms of principal at the amount you're paying down the principal, is that right, Andrew? You'll pay off that extra 15% at a faster rate and your repayments will be higher.

Andrew Nicol: That's right. So the 15% might be paid over a five year period, and the remaining 80% might be on a normal 30 year term. But what that means is your payments that you have to be able to pass the servicing test on are significantly higher. And generally speaking, they would be higher anyway on a high LVR loan, what we would deem as a high LVR loan.

Ed McKnight: But even the ability to lend or borrow up to 80% of the value of an investment property is really exciting. One of the reasons is, of course, is previously, if you bought, say a new property and you did borrow at a hundred percent so 80% of the lending would be obviously against that investment property, if you did this split banking thing and moved that property across so that the mortgage is held with another bank on day one, the day that property settles, that property is going to have negative, usable equity.

That's because it's got 80% of the lending against that property, but you can only borrow up to new lending, 70% of the value on that property so that no longer applies. What that means is any capital you growth you get against your investment properties can automatically be used as usable equity.

Now, that means that you're going to be able to grow your portfolio more quickly because you'll be in a better equity position, which is very exciting for, for property investors, especially relatively new property investors who possibly haven't had as much capital or time at the market who achieved capital growth in order to be able to borrow against that.

And then depending on how much you're able to actually borrow against your own property, there may be more usable equity there. So pretty good for especially first time and newer property investors. But Andrew something to be aware of obviously is any additional margins or costs associated with borrowing over 80% just walk us through that because I don't think we've talked about that for probably about 200 episodes.

Andrew Nicol: So, if you borrow above what the bank's ideal LVR ratio is, which I guess is 80% generally speaking, generally you're going to pay a margin in some way. So normally there are two ways that a margin is charged under what's called a lender's mortgage insurance or LMI it's sometimes called, or a rate increase.

So with a lender's mortgage insurance, what the bank will do is they'll calculate an amount to cover them for the added risk of having a high LVR loan, then they'll add that amount onto your loan, and then normal interest rates apply. Some banks use a rate margin, so they might give you half a percent above whatever the carded rate is.

Now, an interesting point there is often we see investors or people taking out a first home that they might get a rate lower than what the banks actually advertising what we call the carded rate. So normally speaking, if you're buying at these high LVRs, they will take the carded rate, the advertised rate and then add a margin on. So you need to be, if you're factoring in your cash flows, you need to be working on maybe more like 4% despite the fact it's an advertised 3% which is only applicable if you're at 80%, and it's an owner occupied, for example.

So you can expect to see a little bit more of that extra cost. Now, one thing I want to add here, as I do still as a big advocate for split banking, whilst the split banking benefits, if you're taking a new property and moving it over to another bank might not be as beneficial right now. I still think it's really important for control of your portfolio, particularly when you're selling an asset.

So I do still think that that is something that I would investigate if you're looking at taking out an investment mortgage. And remember this is still a 12 month window. So if eleven months from now you haven't bought a rental property, you haven't exhausted your usable equity, I would highly encourage someone who's thinking about investing in the future to value all of their assets, all of their rental properties and set up a revolving credit facility against those properties so that you've got the ability to borrow that money in the future.

Because if we go past that 12 months and the Reserve Bank does put those restrictions back in place, you're not going to be able to go to the bank and get that money anymore.

Ed McKnight: And look, I know that we often talk about investors in the show, but I just want to talk about first time buyers at the moment, because I know there are a few who listen, and it's important and I really want to talk about this, since many first home buyers will be above that 80%, you know, they'll use less than a 20% deposit.

Now, what is important to remember is if you're using a first home loan, so a loan, that's backed by the government because you're a first home buyer and you meet some certain criteria such as having less than $85,000 a year income, if you're buying by yourself a couple of other rules, and there are limits to how expensive the property is, but under those circumstances, the government will actually cover that lenders in mortgages insurance.

So if you're a first home buyer and you meet certain criteria that may not apply for you, but hey, look, Andrew, let's wrap it up there.

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're interested in how to invest in property and specifically how to get passive income and build a passive income from a property portfolio so you can live off it, then tonight, Tuesday the 5th of May, we are recording a webinar specifically about this topic, so I'm going to drop a link to that in the show notes. So swipe or tap on that cover art, it'll take you straight there, or you can find it at Opespartners.co.nz.

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 the New Zealand property market.

Until next time.