Banks and multiple house owners have been given more time before implementation of new rules on treatment of loans to residential property investors

Banks and multiple house owners have been given more time before implementation of new rules on treatment of loans to residential property investors

Banks and multiple house owners have been given more time before the Reserve Bank introduces new rules on the treatment of residential loans to investors with several properties.

The decision to defer introduction of the rules, which apply to investors with five or more properties, from July 1 to December, comes after opposition from banks.

The rules could have implications for the 'risk-weighting' applied to banks' lending for investment properties - given that residential property loans have a much lower risk-weighting than commercial loans.

Also, the rules may likely lead to more expensive loans for investors with several properties, since they may have to pay higher rates of interest.

The big four banks and most others had suggested a delay in implementation of the rules, at least for existing customers.

And the decision to defer the introduction of the new rules comes after an earlier slight back down by the RBNZ in increasing the threshold of properties captured by the proposed new rules from four to five.

That earlier decision also came as the RBNZ went into full reverse over plans to force the country's big four banks to include personal loans and credit card debt in their loan to value ratios (LVRs) on residential lending.

Having made decisions in principle back in December, the RBNZ has subsequently been conducting consultation over the proposed wording and implementation of the new rules.

"Because of technical concerns raised by stakeholders in relation to a couple of proposals, the Reserve Bank has decided to extend the implementation timeline for those items until a later date this year," the RBNZ said in a just-released submissions and decisions paper.

"The proposal that customers with more than five properties ought to be included in the SME retail or corporate asset class is expected to be delayed until December this year..."

The RBNZ said it would arrange workshops with the banks to discuss the technical detail around implementation. 

The new rule about investors with five and more properties reads thus: "If the bank has recourse to, or is aware of, more than five properties owned and let by the borrower directly or through a company or any other ownership structure of the borrower, and the loan is predominantly serviced from the rental income those properties generate, then the loan can no longer be classified as a residential mortgage loan but should be classified as either income producing real estate or SME retail lending. The bank is required to verify whether the customer has any other rental properties or residential mortgage loans with another lender or lenders as part of its credit origination process.

"For the purpose of this section, predominantly means more than 50 percent."

The RBNZ said some of the banks had argued that the "income producing real estate asset class" (IPRE) would be unsuitable to customers with multiple properties as, in their opinion, it should be reserved for specialised lending (where there is nor recourse beyond the assets and its cash flows).

"It was also pointed out that using IPRE would significantly increase the risk weight on those loans," the RBNZ said.

"Some submissions argued that customers should either be treated as SME Retail (as proposed) or if the bank’s exposure to the customer exceeds $1 million, as SME corporate.

"Others stated that they currently did not have an internal model for customers with more than five properties and that new models would have to be commissioned (and of course approved by the Reserve Bank). One bank estimated that this would take 18 months."

The RBNZ said that "most submissions" had highlighted issues with identifying how many properties existing customers actually had and verifying a customer’s number of properties at the point of mortgage origination.

Questions were raised as to whether the five properties had to be located in New Zealand and how to treat part-ownership structures, i.e. do they count in proportion to the share of the customer’s stake in the ownership structure? Related to these issues were questions about the treatment of customers that cross the five properties threshold in either direction, i.e. from four to five properties or conversely from five down to four, and how to manage those customers. 

"Some banks highlighted that they would have to retrain staff on how to treat customers that fall within the five-plus category and gave an indicative timeline of six to nine months.

"It was argued that by not being in the retail asset class, customers would have to be managed on an individual basis, which required the bank to obtain more detailed information.

"That and the higher risk weights could lead to a higher pricing of those loans. The two submissions from parties involved in property investment activity also highlighted concerns about the potential for an increase in the cost of residential property loans for investors with five or more properties," the RBNZ said.

The RBNZ said that the banks had also made suggestions as to how customers with more than five properties could be treated in "the interim".

"Amongst the suggestions made were proposals to start applying the rule to new customers only in the interim and to allow more time for existing customers with more than five properties to be identified."

The RBNZ said it understood the technical difficulties banks have in implementing the rule "and proposes to delay the introduction of the clarified requirement to allow for more time to consider the issues that have been raised and to fine-tune the nature of the requirement".

"That said, some of the timelines proposed by respondents, such as delaying the implementation by up to 18 months, are unduly lengthy. It has therefore been decided to postpone the implementation of the capital treatment of customers who own and let out multiple properties, i.e. property investors, until December 2014."

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Will the RBNZ be paying the break fees so new loans criteria can be applied?
Will the punters sell up the more affordable rental holdings to super invest into a maximum of 4 Herne bay homes?
Or do we all buy boarding houses or multiple properties on a single title?
This is not going to be able to be implimented without the slippery fish escaping the net, how about using existing CGT laws on speculators and leave the accomadation providers alone.
President Of Property
 

Even though it sounds straightfoward to try and identify whether someone owns 5 properties, in practice I can see it becoming a dogs breakfast as property investors attempt to evade being identified as owning 5+ properties. 
 
The easiest thing to do would be to calculate Risk Weighted Assets for owner occupied mortgages as they do now.  And slap every other mortgage loan with a 100% risk weighting.  I think all Banks would accept that the risk profile of owner occupier mortgages to be different to that of other mortgages.  
 
Doing the above would require no additional training of staff (as one would assume that lenders would know if the mortgage they write is owner occupier as opposed to residential investment).  All that would need to change is the calculation in the back end by the quant geeks at head office.
 
Keep it simple.

The obvious place to look is the mortgage and securities register.  A large SME might have many freehold properties, but if it's trading chances are it will have several securities in the pool.  Otherwise each business group would be limited to 1 property per 5 house business grouping.  Not a bad slow down strategy.

I'm just curious where the higher profit goes to....  the bank?? why....

Even if it is not easy the RBNZ must push ahead with this idea. There is no way that someone owning 5 houses is the same risk to the bank as an owner occupier. The stronger and less risky the NZ banks the better.

This is just simply tall poppy syndrome at play.  Property investors who own five plus properties are not driving prices up.  How can someone who buys and holds drive prices up when investors are the ones that tend to buy undervalue properties that return higher yields?
House prices are being driven up mainly by renovators and builders, and people moving into big cities like Auckland for job opportunities.
For example, a couple buy a house to live in for $700k, spend $100k on renovations and sell two years later for $800k.  It shows in the statistics as a price increase, but the statistics do not show the money spent to get the sale price.  It is in effect a different property but the statistics assume it is the same.
Take someone who buys a section for $200k, spends $300k on building a house, and sells for $500k.  This contributes to a statistical price increase, but the property did not go from $200k to $500k due only to rising prices "all else the same".
Ponsonby is regarded as having large price increases recently, but that is one place where owners commonly call the bank to borrow $800k to renovate their property they paid $1.3 million for.  They add to, build under, build on top of and completely rebuild these houses.  But in this scenario, if the owner sells for $2 million they are actually losing money but the statistics would report "rising prices in Ponsonby".
How can a property investor who owns 42 properties in Wellington be charged higher interest when properties are not really even rising in Wellington.  What about the guy that owns seven rentals in Whanganui where prices in Castlecliff are actually dropping? How is it fair that he pays higher interest?
You cannot tell people not to renovate or not to move to Auckland.  Like Hong Kong and New York, people move to places where the work opportunities are.  Price of those places will go up regardless and no one can stop that in a capitalist democratic country.
The Government should not penalise large investors as they are merely accomodation providers.
Think about this:  if the interest rates go up by 1% for larger investors, then the big Australian banks get that full 1% in their profit margin.  The Government tax revenue will then pay for up to 0.33% of that (being a tax rate of up to 33% on the deduction), so the taxpayer will be worse off because of this.  Also, the inestors will put up the rents to absorb some of this, in Auckland anyways, like they did when depreciation was taken away. 
So it is clear everyone will really pay in part for this and it will not stop the actual driving up of prices.
 
 
 

Think about this: if the interest rates go up by 1% for larger investors, then the big Australian banks get that full 1% in their profit margin.
Really?? Do you think the 1% increase in rates goes striaght onto the Banks bottom line. Have you not seen the increase in'COF and other rates? Looks like in some ways compedition at present is holding the rates 2 years plus? $3,000 give aways on home lome for new lending over $100k as offered by some banks. I guess you think this cost doesnt come out of their expense line as well?

Hi Stanley123
My comment relates to bank stability, the GFC shows that banks need to be watched.
"How can a property investor who owns 42 properties in Wellington be charged higher interest when properties are not really even rising in Wellington." Do banks allow an investor of this scale to have a loan greater than 60%? should have strong cash flow, so no more danger to bank.
"Like Hong Kong and New York, people move to places where the work opportunities are.  Price of those places will go up regardless and no one can stop that in a capitalist democratic country." Only as long as they can pay, otherwise they will move with the best and brightest leaving first.
"What about the guy that owns seven rentals in Whanganui where prices in Castlecliff are actually dropping?"  He may have made a mistake and invested badly and will need to take responsibility. Otherwise he will be adding to his portfolio with bargin buys.

I would think that a Property Investor with 42 properties in one place is very risky proposition.  Look at all that concentration risk, if economy in Welly goes bad then that portfolio is likely to get hit hard.  The Wanganui situation described is a perfect example of why PI mortgages should attract more capital than owner occupiers.

Stanley, I agree with many points you have made.  However, the whole point of the change is to  ensure that lenders set aside an adequate level capital for when things go bad.  It has nothing to do with the tall poppy syndrome.
 
Property investors dodged a bullet when the central banks around the world cut interest rates to record low levels.  Banks were too big to fail - if more mortgages went bad then the whole financial system would have collapsed.  (I think) The RBNZ believes that property investor mortgages are inherently more riskier than owner occupier mortgages and therefore lenders  should hold more capital for those property investor mortgages.  
 
The question I ask you is,"Why should owner occupier's pay the same interests rates that property investors do?"  The owner occupier should be applauding the RBNZ as this policy would reduce the need for more OCR increases.

Hi FromAnotherPlanet,
That is an interesting question ("Why should owner occupier's pay the same interest rates that property investors do?").
From what I see at the moment, multiple property investors pay more than owner occupiers.
Multiple investors with five plus properties have to get their lending in most cases through the business banking area of the banks as opposed to the retail branches that the owner occupiers borrow through.  While owner occupiers get cash contributions of $1,500 to $5,000 and very discounted interest rates when they ask for them (and I see this every day at work), the investors find it difficult to negotiate discounts and often have to take carded rates as the banks know it is difficult for them to switch due to the complexity of their lending and statements of position, find it hard to get cash contributions at all and even get charged application fees and refixing fees would you believe :-)
I would think a property investor who has the lending of three to ten individual homeowners should actually get better rates and contributions as they bring heaps of business to a bank compared to one homeowner.  But the opposite is more often true and it can be seen to be unfair.
Instead of charging multiple investors even more, maybe it would be better just to have a lower LVR requirement for them.  Most five plus property owners I know have LVRs lower than 60% anyways and I think that they are lower risk than an individual homeowner.
All the high 80% LVRs I have seen are struggling families in middle class suburbs who can sometimes suffer a redundancy or lower income and suddenly end up with collections.  Multiple investors have so many different sources of income being all the individual rents and wages etc so loss of one rent has little impact compared with a family or solo mum home owner in Manurewa losing their only salary with many mouths to feed.
 
 

Hi Money Man,
That is a good question.  I was thinking along the lines of the cash contributions etc are coming from the existing bottom line as they are already happening and then the extra interest being added on top of that :-)
It just seems that the only winners in this are going to be the banks in Australia who have the expensive cars in their carparks, the big Melbourne yachts and corporate boxes in Eden Park for their corporate clients, and CEOs that make $80k per fortnight net.  They are going to make larger profits from what I see is not higher risk while the taxes collected will decrease (all else the same), there would be upward pressure on rents (all else the same) and many multiple investors in the five plus category who have owned their properties for 25 plus years may actually have no lending at all.
I do not see that multiple investors are a higher risk as (1) we can have LVRs that are really low compared to the average one home person and (2) we have many different income flows ie personal income and each individual rent, so unlikely for one event like illness, injury or redundancy putting a fatal blow on our budget and sending us to the collections or recoveries area of the bank, and (3) are really nice people too who are really good to our tenants.
 

Seems we are past the point of no return - it's no longer a should they do it but rather a question of what effect it will have on the housing market when they do. 
And I assume those property investors that decide to sell down to get below the threshold will be liable for capital gains tax - or will they, given it is a change in asset class treatment that has prompted them to sell? 

Hi Kate, some reading for you. I was going to put it on 90 @ 9 But Im traveling all day.
http://www.paulcraigroberts.org/2014/06/08/washingtons-iron-curtain-dian...
 
http://www.voltairenet.org/article184283.html
 
http://www.zerohedge.com/news/2014-06-15/isis-jihadists-release-shocking...
 
 Housing is not really that big a deal.

That 'Iron Curtain' link is just so clear.  Thank Andrewj.

That's for sure!

Couldn't agree more on that last line Andew.....there are some highly concerning issues being reported by some alternative media sources and in typical fashion MSM is not doing its job.
 
I think MSM forgets how small the world really is and how many kiwis are spread around the globe and how quickly these people can also get messages out via social media and other platforms.

Why not go for a 60% LTV for all 'as of right' and uplift that to 80%- 90% for owner occupiers only who own no other income producing properties.
Time for the banks to stop moaning when every little RBNZ action threatens their income stream.

Yes, too easy
 
Worthwhile giving thought to how you define owner-occupier
 
People who have hidden their primary residence (plus any others for that matter) into either a family trust or a limited liability coy, are no longer owner-occupiers
 
In the case of a Trust, the Trust is the owner, administered by the trustees, while the Trustees and Beneficiaries are probably the occupiers. Same goes for a property owned by a Limited Liability coy
 
That would bring the Property Owning Property Hiding Trust business to its knees

From my experience, owner occupiers and first home buyers are a higher risk than investors such as myself. If they lose their job(s) they are in big trouble - they pay far too much... and they over extend in the first place to either buy their dream home or worse... buy land to build it. On top of that, they have borrowed on an asset which doesn't produce an income other than personal shelter. The bank agrees with me. They like making money out of me.
I have been classified as a business customer for years...  I just don't quite understand what this is all about.  The bank has told me that they will not be increasing my mortgage rates... again, they want my business.

I think it is necessary to ask the more pertinent question of whether the RBNZ is unconstitutional or not......