RBNZ prescribes higher loan costs for investors

Reserve Bank Governor Graeme Wheeler

The RBNZ’s new asset class for bank loans to residential property investors is set to take effect in October – and it looks like higher costs will be the order of the day for investors.

From 1 October  2015, residential property investor loans will be defined as any retail mortgage secured on a residential property that is not owner-occupied.

Banks will be expected to hold more capital against this asset class to reflect the higher risks inherent in such lending.

Late last week, the RBNZ released a paper containing details of its decisions about bank capital adequacy requirements for residential property investment mortgage loans.

In a bid to make capital requirements proportionate to the risk involved in residential property investment lending, the RBNZ has proposed a new set of calibrations.

These include higher correlation factors in the Basel equation and higher loss given default (LGD) rates than the current calibrations for all mortgage loans – which will still apply to owner-occupier mortgages.

This means that the minimum LGDs for residential mortgage loans considered to be for property investment, as opposed to those for owner-occupiers, will be higher.

Likewise, there will be higher risk weights per LVR band for residential mortgage loans for property investment.

According to the RBNZ, these calibrations will lead to a higher capital outcome for residential property investment mortgages compared to owner-occupier loans.

“However, the capital outcome will be below that of using the income producing real estate asset class 10 and, in the Reserve Bank’s opinion, reflect the mix of property investment borrowers that the new asset class will entail.”

The RBNZ paper also said that banks were largely supportive of the owner-occupier classification – compared to alternatives like a “five plus” property definition or a rental income-based test.

This was because of the relative ease it could be implemented, along with lower compliance and implementation costs than would have come with the alternative options.

However, NZ Property Investor Federation executive officer Andrew King was not pleased with the RBNZ’s proposals – which he described as a “further blow for landlords and tenants”.

He said making rental property loans more expensive will simply push up the cost of providing rental properties.

New Zealand’s banking system is sound and the announced measures are not required, King continued.

“The main effect they will have is to increase the cost of providing homes to tenants which will put more pressure on rental prices… at a time when we need more rental properties and some tenants are already struggling with rental costs.”

The Reserve Bank’s Regulatory impact assessment on the asset class treatment of residential property investment loans paper can be read here.

A summary of submissions made to the RBNZ during the consultation process is available to be read here.