Investors become commercial borrowers

The Reserve Bank has issued a summary of submissions and final policy decisions based on its consultation paper reviewing bank capital adequacy requirements for housing loans.

That paper had proposed that if a borrower had lending on four or more dwellings with a bank, the loan could no longer be classified as a residential mortgage loan.

The Reserve Bank said some submissions to that paper had argued that drawing a boundary at a specific number would just encourage customers to split their borrowing across more than one lender, potentially limiting a bank’s ability to assess the customer’s credit risk and increasing overall risk, and disadvantaging borrowers with considerable other income that made the repayment of their loans not dependent on the rental income from those properties.

It said in response: “We are retaining a count-based element in the determination of the boundary between residential mortgage lending and commercial property investor lending, although this will also include an income test. The count threshold, however, has been increased to five properties and greater clarity will be provided as regards the treatment of multiple dwellings within a property.”

It said investors with more than five properties, regardless of whatever other income sources or revenue streams might exist, should be treated as running a small business. “To avoid further confusion, this would mean treating those loans as corporate property loans."

Property consultant and accountant Matthew Gilligan said he had been affected by the new rules.

He said banks were cautious about providing 80% loans to people who had to be classed as commercial borrowers.

He said it seemed banks were still finding their way, though. One had wanted a 25% deposit from him while another had taken him on at 10% on the strength of his income and equity position. “Banks are still making up their minds a bit on how it affects clients.”

He said it would further reduce liquidity in the market. “There is some speculation that it will be applied on a five-property rule per bank, which would soften the impact for some. This is rough stuff for property investors and arguably will tighten housing supply, discouraging bigger investors from participating in construction of larger-scale portfolios. It must further spook the market in the short run.”

BNZ said once investors got beyond five properties, any consecutive properties purchased would have to have a maximum LVR of 70% to manage risk.