On October 1, new loan-to-value ratio (LVR) restrictions from the Reserve Bank came into effect, significantly changing the borrowing landscape of New Zealand. No longer restricted to Auckland, the limits now affect the whole of New Zealand, while the rules themselves have become significantly more intense. Investors, no matter where they are buying, now need a 40 per cent deposit to purchase a home, and anyone with overseas income will have found additional hurdles to overcome. However, while some of the restrictions have had obvious effects, there are some implications which are a little more subtle. JB, Head Squirrel, gets us up to speed on what it all means in the video below.
1) The effect on rent-vestment
Rent-vestment is the strategy through which a person, usually a younger Kiwi, buys their first property as an investment instead of their own home. They rent out this property while also renting themselves, using their income as a landlord to subsidise their own costs. However, the new LVR restrictions could have a serious impact on the effectiveness of this strategy. Because younger Kiwis tend to have a lot less capital than more experienced investors, the LVR restrictions could lock them out of rent-vestment. Many people find a 20 per cent deposit difficult enough to save for, so doubling that becomes near-impossible. Furthermore, because the restrictions have stretched to the entire country instead of just Auckland, there's no more chance of rent-vestors buying a home in a less expensive area as a way to get around the rules. Unless you've already got significant cash or equity to throw around, growing your portfolio just got that much harder.
2) Selling your properties is far less effective
Sometimes, you need to sell an investment property. You may think you would be able to access all the equity in a property by selling it, but under the new LVR rules, that isn't always the case. If you have an investment property with a 70 or 80 per cent LVR and you decide to sell it, you could find that the bank retrieves a significant portion of the proceeds from the sale in order to bring you back to a 60 per cent LVR. As a result, you've just sold an important asset with the assumption you will get a significant cash injection - but the reality is very different, and could have serious implications for your overall investment strategy.
3) Spreading across banks has become more important
One of the major benefits to using a mortgage broking service like Squirrel is that you don't have to rely on only a single bank. As a third party, a mortgage broker can sort the best deal for your needs across multiple banks, using their experience and industry knowledge to your benefit. If you're a property investor, you'll want the most bang for your buck - and the key to that is having the right loan from the right lender. However, with the new LVR restrictions, this ability has become ever more important. As JB explains in the above video, one of the exemptions to the restrictions is refinancing your loan from one bank to another. If you have an 80 per cent LVR on a property, you can refinance that to another bank without issue. Spreading your commitments across multiple lenders is no longer just nice to have: It's quickly becoming an incredibly important part of many investment strategies. These are just a few of the significant adjustments investors will need to make to their investment methods, but there's one factor that still remains a constant: The importance of getting the right advice. For more information on the new RBNZ rules and how they affect you, make sure you get in touch with the team here at Squirrel.
Growing your portfolio just got that much harder.