The rules around lending in New Zealand are changing about as fast as homes are flying off the market. Here, our Solicitor, Sophie Diedrichs, answers some of the most common questions surrounding developments.
What’s the crux of the Reserve Bank’s latest decision?
The Reserve Bank’s most recent changes require all borrowers who are buying property as an investment to have a 40 percent deposit before a bank can lend to them.
As a client who’s in the market to buy, what do I need to be aware of?
As above, if you’re buying property as an investment, you’ll need a significantly larger deposit. More broadly, you also need to be aware that this might be just one of multiple policy changes to be rolled out over the next wee while – and it might be that, at some point, these initiatives start to have the desired effect: cooling the housing market.
It is also crucial to note that changes might occur in the New Zealand market due to international events outside of our country’s control, and have the effect of dampening the housing market, or, in the worst case scenario, crashing it completely. If that does transpire, then investment properties used as rentals or for “land banking” purposes might be significantly less profitable or commercially viable than they are currently.
I’m interested only in buying a family home – what does this mean for me?
The purpose of the changes is to reduce the amount of people investing in property, which the Government hopes will cool the housing market by lowering demand. The intended result of which being there will be more properties available for families to purchase at lower prices. Whether or not those intended changes actually eventuate remains to be seen.
I am, or want to be, a property investor – what do I need to know?
Investors will need to have 40 percent of the value of the property they seek lending to purchase. If they don’t have it, they will not get finance for the purchase. Some banks also see properties with a second residential unit such as a granny flat or self-contained apartment, in addition to the main house, as being investment properties, so you need to discuss this with your bank to see how they approach it, and possibly look at other banks if required.
I’ve heard murmurings that this might have flow-on effects to lending to small businesses …
Some commentators note that the new restrictions will cause problems for small businesses which are relying on investment property or properties to provide security for unrelated business lending.
All this really means is the amount of equity in an investment property that can be used as security for a business loan is now 60 percent, instead of previously being 80 percent. In real terms, this just means that businesses will not be able to leverage themselves off separate investment properties to the extent that was previously possible.
That may have real effects to small businesses in limited cases, creating a need for them to review their financing arrangements. Small business owners in the Upper Clutha area should discuss any concerns with their banks, if they’re at all concerned they might be affected.