At the beginning of the Covid pandemic last year in May, the Reserve Bank removed the LVR restrictions. At the time, the Bank wanted to promote cash flow and increase economic confidence. However, the economy has bounced back stronger than expected.
Skyrocketing house prices plus intense activity from investors have led to the RB’s reintroduction of LVR.
The idea for the RB was to crack down bank lending to residential property investors.
From May 1, at least 95% of new bank lending to residential property investors will have to go to borrowers with deposits of at least 40%. As an interim measure, from March 1 to April 30, this deposit requirement will be set at 30%. This is the same level LVRs were at when they were removed in May 2020 due to COVID-19.
The RBNZ is taking a staged approach to enable banks to manage their pipelines of loan applications that have been approved but not yet settled.
However, RB expects lenders to respect the 40% rule “immediately with all new loan approvals”.
As for owner-occupiers, from March 1, at least 80% of new bank lending will need to go to borrowers with deposits of at least 20%. This is the same level LVRs were at before they were removed last year.
So, what does it mean for investors like you?
The 40% deposit requirement will likely cool investor demand. And the banks’ conservative approach to lending will also apply to property investors.
The Bank basically says that If you [investor] are looking to buy more properties in the current market, you will need to come up with big deposits. So, if you want to free up some capital, then it may be time to review your portfolio. Selling an inefficient property will release cash that you can invest elsewhere.
Non-bank lenders are another option as they are not affected by the same restrictions as mainstream banks. Although their mortgages tend to be more expensive, the numbers may still add up. So, it’s an option worth exploring.