It’s that time of the year when the Reserve Bank releases all it’s statistics on current and new mortgages.  The statistics are broken down into new lending, existing lending, interest only and principal and interest payments.

Some highlights from the release are:

  • $5.85b of total new lending in March
    • as you would expect this is up from $4.6b in February 2018 and $3.7b in January but down slightly from almost $6b in March 2017 and $6.6b in March 2016
  • Noticeably, Interest Only lending has reduced significantly.  In previous years, Interest Only for new lending was 34% (March 2017) and 40% (March 2016).  This March, Interest Only lending for new mortgages represented 28.8% of new loans
  • 27% of existing lending is currently on Interest Only

Interest Only reduction

The Reserve Bank has previously indicated that they would like the banks to reduce the amount of mortgages on Interest Only even further.  As a result of this, a number of banks have implemented strong measures to ensure that clients aren’t perpetually keeping their mortgages on interest only loans.

And this is a good thing.  It is not a good strategy to keep your mortgage on Interest Only indefinitely.  If interest rates increase, you are liable for significantly higher payments.  The more you pay off your mortgage, the less risk you have with increasing interest rates.

Interest Only and Property Investors

But property investors who are already making additional payments on their personal mortgages are not being allowed to keep their investment mortgages on Interest Only.

Mortgage Tip: It’s a standard financial strategy to keep all your investment mortgages on Interest Only while you pour your money into paying down your personal mortgage.  Only once you have paid off the personal mortgage, you begin to pay down the investment portion.

But banks are declining Interest Only extensions even for clients who are making large payments to their mortgage.  Most New Zealand banks now limit an Interest Only term to a maximum of 5 years before the client is required to begin paying down their mortgage.  However, it’s this kind of one-size-fits-all policy that is costing investment clients by reducing their tax liability.

There are banks, for example, that are simply refusing to extend Interest Only periods for any clients with over 70% LVR (Loan to Value Ratio).  As a result, we have clients who are now having to divert their personal mortgage payments to pay down their investment mortgage.  It still results in the mortgage being paid in the same amount of time but has severely disadvantaged the client from a tax perspective.

The war on property

In the past 10 years, property investors have had several advantages taken away from them that previously made property more lucrative.  The removal of claimable depreciation in Budget 2010 followed by the introduction of the bright-line test in 2015 which applied a capital gains tax to properties bought and sold in less than 2 years.  The bill (https://www.parliament.nz/en/pb/bills-and-laws/bills-proposed-laws/document/BILL_72842/taxation-annual-rates-for-2017-18-employment-and-investment) to extend the bright-line test from 2 years to 5 years has passed it’s third reading and will become law.

Since 2013, property investors have only been able to borrow up to 60% LVR on investments properties with this being lifted to 65% in January 2018.

Interest Only is different

The previous policies were designed to cool an extremely hot property market and, to a large extent, this has been successful.  The LVR rules, for example, were put in place to limit the investors that were crowding out the first home buyers.  But these Interest Only policies that force investment property owners into a disadvantaged tax situation benefit no one.  They were paying down their mortgage and staying within the rules with their tax deductions.  Why are they being targeted?

It seems that the banks are turning a blind eye to situations where clients are paying their personal mortgage because it would be too hard to monitor.

But realistically, it would take a very simple assessment: are the proposed Principal payments going to pay down the entire mortgage in 30 years or less (for a new mortgage)?  If so, the clients should be able to place any mortgage up to the maximum value of their investment properties on Interest Only.

The solution

It could be time to change banks if you are quickly paying down your personal mortgage but your investment mortgage is not being extended by your bank.   A new bank should allow you to reset that 5 year stopwatch and place the investment mortgage on Interest Only again.  There are some important caveats to this:

  • You need to be making additional payments on your personal mortgage so that your entire mortgage will be paid off in at least 30 years (or sooner)
  • It may not be financially feasible to change banks if you are going to be charged break fees.  Before changing, compare the interest rate savings, total cost of break fees and the tax advantages that you will gain or lose

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