By Gareth Vaughan
The New Zealand Bankers' Association (NZBA) says although banks must take incoming Reserve Bank restrictions on low equity residential mortgage lending very seriously, there are ways around them for borrowers.
The NZBA has issued a question and answer paper on the Reserve Bank's loan-to-value ratio (LVR) restrictions noting that whilst its member banks are committed to meeting their obligations as registered banks and will comply with the new lending requirements, they compete strongly with each other and will do all they can to meet customer needs. For the banks meeting the Reserve Bank LVR requirements will be a condition of bank registration.
The bank lobby group said that although it's not in a position to advise people on how to get around the restrictions, there had been plenty of speculation suggesting people without enough savings to meet the deposit threshold, might seek additional funding elsewhere. For example this could be via unsecured loans from third tier lenders at much higher interest rates, loans from friends and family, or by using equity in a family member’s property as security for the loan, the NZBA said.
"We advise people to talk to their bank about their individual needs and circumstances."
Meanwhile, the NZBA said that, whilst LVR limits may have an initial impact on house prices by removing some entrants from the market, longer term they could encourage an increase in investor activity.
"For example, higher equity lending under 80% LVR might attract lower interest rates, and so make it easier for investors to borrow and buy properties, thereby driving up property prices."
"LVR limits may well push out a rise in the Official Cash Rate, and so keep historically low interest rates lower for longer. That’s good news for the around 30% of households that have a mortgage. It’s not so good for the third of households who are freehold and may rely on income from interest on their savings to get by. Savers have had to deal with low interest rate returns for some time now, and this move won’t help them," the NZBA said.
From October 1 all banks must restrict new residential mortgage lending at LVRs of over 80% to no more than 10% of the dollar value of their new housing lending flows. Allowing for exemptions the Reserve Bank estimates this 10% "speed limit" will effectively limit the banks’ high-LVR lending flows to about 15% of their new residential lending, versus the estimated 30% they've been doing in recent months.
Banks do, however, have six months to phase in the new restrictions meaning the first test of the LVR restrictions will effectively come at the end of March next year
As interest.co.nz reported yesterday, the Reserve Bank wants to fully align the way the big four banks - ANZ, ASB, BNZ and Westpac - categorise LVR residential mortgage lending with the way the rest of the country's banks do it. This would see personal loans and credit card debts, when secured by a property, included in LVR calculations by the big four as they are by the other banks.
Interest.co.nz asked the big four banks for comment on this, including what impact it could have on the percentage of their home lending categorised as high LVR lending. So far only ASB and Westpac have responded.
Shaun Drylie, ASB's general manager for retail products and strategy said (via a spokeswoman): “ASB is currently reviewing the consultation paper released by the RBNZ on 20 September 2013, to understand any impacts it may have on our current measurement of housing lending. ASB supports any proposal that seeks to enhance the consistency of definitions and terms used in the calculation of the Loan to Valuation ratio (LVR). Yet, we note RBNZ’s proposal for the inclusion of unsecured lending such as personal loans and credit cards in the LVR suggests a greater level of scrutiny in the calculation than has been seen to date.”
And a Westpac spokeswoman said: "We are in the process of considering the discussion paper".
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