Mainstream banks have started to respond to the LVR (Loan to Value Ratio) restrictions following the Reserve Bank’s announcement on November 29th 2017.
LVR on Investment properties
Most major banks have indicated that, as of 1st January 2018, they will begin lending up to 65% on investment properties (up from 60% this year).
Let’s say a couple have their own house and want to buy an investment property, both valued at $500,000. Previously they could borrow up to 80% on their own home ($400,000) and 60% on the new investment property ($300,000). In other words, the total borrowing on their $1 million property portfolio would be $700,000.
As of the 1st January 2018, the same couple will be able to borrow $400,000 on their own home as before. But now they will be able to borrow $325,000 (65% LVR) for a total borrowing of $725,000.
Is this enough?
With the new rules, it is slightly easier to borrow to purchase an investment property. It won’t open the flood gates but buyers who are currently just short of being able to buy may find themselves back in the market. I think this is exactly the outcome that the Reserve Bank are hoping for.
Low (high LVR) Deposit Buyers
There has been some confusion around this change of policy. Currently, 10% of any bank’s new owner-occupied mortgages can be lent to clients with less than 20% deposit. In other words, those with higher than 80% LVR.
The LVR mark is still 80% however the banks can now lend up to 15% of their new owner-occupied mortgages to low deposit buyers.
And banks are already indicating how this is going to change. One bank, who has recently declined almost all mortgages over 85%, has indicated that they are now more prepared to look at up to 90% again.
Is this enough?
A mere 5% increase in available lending doesn’t sound like much. But the question has to be asked, what percentage of lending goes to low deposit buyers if there are no restrictions? Of course, it’s not 100%. A large portion of mortgages will always to be low LVR owners simply due to the nature of capital growth.
Given this, I think the change to the available lending is going to more significant than it initially sounds. And the great news is, this is going to affect first home buyers the most (for the better). This will allow those with a deposit hurdle more of a chance to get into the home they want.
Some exciting changes are happening to the property market. The 2 main changes are:
- Investment property buyers no longer require as much deposit to purchase
- Low deposit borrowers have a better chance of being able to get a mortgage if they are borrowing >80%
A common phrase in mortgage world is the “one bank trap”. It’s when you have all your lending with one bank which gives the policy makers at the bank all the power and lowers your negotiating power. If the bank’s policy changes, all your investment eggs are in the same basket.
But if you spread yourself too thin, you create a different type of nightmare.
Let’s use Joe Bloggs as an example. Let’s say he has 5 investment properties with $1.5m of mortgages. For this simple example, let’s say he has no personal debt. How should he spread his mortgages?
The One Bank Trap theory says that if all his debt is with one bank he’s exposed to their rates and their rules. He also can’t play the other banks off against each other.
But lets look at the other extreme. Spreading his 5 properties across 5 banks means he could give each bank $300k debt each (assuming all properties are equal value). But this means each bank is hardly making any money on their slice of the mortgage. He also now has 5 internet logins and a large stack of eftpos cards in his wallet.
My general rule of thumb is to give a bank around $1m of lending and then look around for another bank. In this case he might give the first bank 3 properties and $900k of lending. This would certainly put him in the “preferred category” and would also mean he is likely to get the best rates.
He can then diversify the rest of his borrowing to a second bank. He might give them $600k and using the first bank’s rates to negotiate the second bank lower.
In summary, become a premium client with one bank by borrowing more than, or close to, $1m. Once you’re there, begin to diversify. Don’t get too hung up on the One Bank Trap before you need to.
About 3 years ago, 80% of all mortgages were sitting on a floating rate. And with good reason. The interest rates were falling off a cliff. In a couple of years, fixed rates had gone from ~10% to 5% so fixing your mortgage for any number of years didn’t seem like good maths.
Nowadays, the pressure on interest rates seems to be up (or at least flat). Interest rates are still at comparatively historic lows so fixing seems like a good option but there are some questions you need to ask yourself before going ahead with fixing your mortgage.
Do I have some savings that I can use to reduce my loan?
If you have been paid a bonus or have managed to save up some money, re-fixing is a good time to pay down your mortgage. There won’t be any break fees and the money will not be available to tempt you to spend. If you use a Revolving Credit account and have paid this down, you can pull the money out of there, pay down your mortgage and begin to pay down the Revolving Credit all over again.
Am I likely to sell my house while the fixed period is in effect?
If you sell a property and the mortgage is fixed, there is a small chance you may have to pay a break fee. When you fix your mortgage, you’ve promised the bank to borrow $… over … years but by selling before the maturity date, you are breaking this promise. The bank needs to repay the people who have leant them money and this can come with a fee. If you are looking to sell, consider a shorter fix period (eg; 6 months) or if it is very close, consider leaving it on floating and negotiating a discount on that rate.
How easily can I make additional payments after fixing the loan?
In NZ, banks have 2 methods of making extra payments on a fixed loan (without break fees). Most allow you to increase the payments by up to 20%; so if you are paying $500 per week, then you can increase it to $600 per week with no penalty. The only caveat is that you cannot reduce those payments again until the end of the fixed rate.
One bank allows you to pay up to 5% off the amount owing without break fees. So if you have a $500,000 mortgage, you could pay $25,000 per year off without penalty (there is a $100 admin fee though).
It’s important to know which method suits you and choose the bank accordingly. Paying even a little extra money off your mortgage can save you tens of thousands of dollars down the track.
At The Mortgage Lab, we walk our clients through their mortgage refix at no cost. Feel free to give your Adviser a call to discuss your options.