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."