In March the Reserve Bank will reimplement LVR (loan-to-value ratio) restrictions on property investors. This will mean lending for investment properties will be required to have a 70% or possibly 60% loan-to-value ratio.
In the meantime, banks have preemptively made the move already, with all banks going up to a maximum of 70% LVR on investment properties and ANZ going a step further to 60% LVR. If the Reserve Bank doesn’t implement 60% as a rule, then I suspect ANZ will step back to 70% alongside the other banks.
Banks will be taking a conservative approach
The first and most important thing to understand is that compliance with an LVR restriction is a condition of a bank’s license. Non-compliance comes with very high risks and serious consequences. As a result, banks tend to be conservative and err on the side of caution.
It also means that for you the borrower, any attempt to get around the rules by providing false information about a property would be foolish and fraudulent. Banks take their responsibilities very seriously, so this won’t feel like getting slapped by a wet bus ticket.
There are however things you can do, and should do, to manage your portfolio.
Don’t keep all your eggs in one basket
The first thing you should do is split your lending across banks. You should make sure that all of your usable equity is accessible and that you are at 70% LVR with your lenders.
Your spare equity can be sitting in a revolving credit or offset loan, or in an unencumbered property or a combination of both. Obviously if the LVR cap is dropped then the earlier you do this, the better.
What about buying more properties?
If you want to buy more properties, then you will need a 30% or possibly 40% deposit. That will necessitate big deposits. You could review your property portfolio and sell an inefficient property to free up capital.
Let’s face it, no property looks particularly bad in this low interest rate environment. To me, renovating old rentals and selling them to first home buyers feels like a good way to release capital for further investment and help free up stock for first home buyers. The objective is to rebalance your portfolio to maximise capital growth.
Non-bank lenders could be an option
Non-bank lenders aren’t hit with the same restrictions, but they are more expensive with prime mortgage rates of between 3.30% and 3.80%. That can put investors off, but you should not be dismissive without first doing your numbers.
Don’t fixate on the mortgage rate but instead look at your feasibility. If a property value increases at 5.00% per year and it is generating 2.50% net yield, then it is still generating a 20% after-tax return on your capital.
In the long-term, house prices cannot increase faster than incomes. It’s mathematically impossible.
What is happening is all about low interest rates and it impacts on all asset prices, not just property. But let’s not also forget about household incomes which have been increasing on average by 3.50% per year over the past ten years. Higher incomes and lower interest rates are a massive boon for property prices.
I’m on record during COVID as saying that the average house price in New Zealand will hit $1 million by 2030. As crazy as it sounds, there is still more capital growth to come.
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