New mortgage lending restrictions: how they work, who wins and who loses

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This Reserve Bank graph suggests our housing market is overvalued by 25%. Are their new loan to value ratio restrictions going to help here? Let’s find out.

 

Finally. After a couple of official false alarms, and plenty of tough lectures from officials, it’s finally, officially happening. Yesterday, Reserve Bank officials finally announced their official plan, to impose limits on high loan to value ratios, is finally official.

Think that paragraph was tough going? You now have some idea of what the long wait for this announcement felt like.

So what does this officially mean for you? If you’re a first home buyer, as we’ve warned in the past, it’s not especially good news.

From 1 October, “banks will be required to restrict new residential mortgage lending at LVRs of over 80 percent to no more than 10 percent of the dollar value of their new housing lending flows.”

So if a bank lent out, say, $100 million in the next three months in mortgages, just $10 million of that could be used for high-LVR loans. This is stricter than the 12% the Reserve Bank had hinted at previously.

Exemptions are being made for refinanced loans, those already preapproved, loans where people are moving house but not increasing their loan amount, and Welcome Home Loans.

 

Who’s most affected by this?

The new limits will affect some banks more than others. In the last three months ASB lent out $852 million in home loans; 73% of that lending was on loans where the LVR was above 80%.

On the other hand, 99% of Westpac’s new mortgage lending went on low-LVR loans. Just three percent of new lending from ANZ went on high-LVR loans. You can guess which bank will find the new rules harder to adjust to.

But back to you, dear home buyer. If you’re a first timer with less than 20% saved for a home, you’re going to find it much harder to get a loan. Not impossible, but harder. It doesn’t matter if you can meet the mortgage repayments easily; if you haven’t got the initial deposit then there is less money available for you to borrow.

Investors, and others with at least 20% saved, will find it easier. It’s likely too that investors will fill the gap left by first home buyers, meaning the hoped-for slowdown in prices will be, at best, temporary.

 

What are the experts saying?

In this morning’s Herald, Harcourts boss Hayden Duncan says, again, that the issue is supply, and the rules unfairly “penalise first home buyers who are already struggling to enter the market… Those who can afford to pay more will continue to do so.”

HSBC’s economists reckon it will have little effect, as “a combination of low interest rates, rising inward migration and supply-side constraints are likely to see house price inflation remain elevated for some time.”

Kiwibank has said when it comes to high LVR loans, first home buyers will get priority ahead of investors and other candidates.

At interest.co.nz, David Hargreaves fears the limits will mean first home buyers will borrow from other, less reliable institutions – and reminds us what happened to all those finance companies when the last housing bubble popped.

Westpac’s Michael Gordon predicts an initial ‘sticker shock’ effect (when someone sees the price of something and spits out their coffee), but little long term effect on prices. He foresees higher borrowing costs for high LVR loans and lower borrowing costs for low-LVR loans. Ultimately, he says, “LVR limits will affect who gets the houses, but they do not affect what a given individual is willing to pay for a house.”

We had a good talk about this issue in May, where we explained why LVR restrictions not only unfairly hurt first home buyers, but all the reasons why they are destined to fail. Worth a read.

 

Looking on the bright side

We’ve criticised the idea of restrictions in the past enough times – now let’s try and see the bright side.

The Reserve Bank’s overriding goal is achieving price stability. Avoiding a property bubble would help. By targeting high LVR loans they leave the Official Cash Rate untouched, meaning interest rates stay low. Good news for most home buyers – and certainly for those with floating mortgages. It’s good for first home buyers who have to wait a while too – anything that slows down interest rate rises will make buyers of all stripes happy.

There is no doubt some who borrow over 80% are probably much safer saving a minimum of 20% instead. If these measures stop those folk from borrowing, that is good news for them – and the economy.

It’s not, though, good enough news to get first home buyers dancing in the streets, especially streets outside of Auckland that haven’t seen the same kind of price rises.

Anyway, what’s your view? Are these LVR limits long overdue, or will they do nothing except punish the wrong people? Leave your official views in the comments below or on our Facebook page.

One thought on “New mortgage lending restrictions: how they work, who wins and who loses

  1. Pingback: September Property Report: banks vs first home buyers, Reserve Bank vs Parliament, and supply vs demand | Open2view

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