Archive | Lending policies

Reserve Bank confirms loan restrictions go nationwide

The Reserve Bank confirmed yesterday that new rules will tighten restrictions on bank lending to residential property buyers throughout New Zealand.

From 1 October, residential property investors will generally need a 40% deposit for a mortgage loan, and owner-occupiers will generally need a 20% deposit. In both cases, banks will still be allowed to make a small proportion of their lending to borrowers with smaller deposits.

The bank confirmed the new rules in its response to submissions to its public consultation about changes to loan:value ratio (LVR) rules that it issued on 19 July. It said it was modifying its proposals in response to public consultation, and through meetings & workshops with banks that are subject to the rules.

Although the new rules take effect only on 1 October, the Reserve Bank said commercial banks had chosen to start following the new limits already.

Existing exemptions to LVR restrictions will continue to apply under the new rules and have been extended to include borrowing for a newly built home, or to do work needed for a residence to comply with new building codes & rental-property standards.

Summary of changes to LVR rules– main changes shown in red – first for borrowers who are owner-occupiers:

Previous: In Auckland, 10% of a bank’s total lending to owner-occupiers can be to borrowers with a deposit less than 20% of the house value. Outside Auckland, 15% of a bank’s total lending can be to borrowers with a deposit less than 20% of the house value

Change: For all of New Zealand, 10% of a bank’s total lending to owner-occupiers can be to borrowers with a deposit less than 20% of the house value

For borrowers who are residential property investors:

Previous: In Auckland, 5% of a bank’s total lending to residential property investors can be to borrowers with a deposit less than 30% of the house value. Outside Auckland, owner-occupiers & residential property investors are treated the same. 15% of a bank’s total lending can be to borrowers with a deposit less than 20% of the house value

Change: For all New Zealand, 5% of a bank’s total lending to residential property investors can be to borrowers with a deposit less than 40% of the house value. In Auckland, borrowers who include an owner-occupied residence in a portfolio of mortgaged houses are allowed to borrow up to 70% of the value of the entire property portfolio. For all New Zealand, borrowers who include an owner-occupied residence in a portfolio of mortgaged houses are allowed to borrow up to 80% of the value of their owner-occupier home and 60% of the value of their investment properties.

Exemptions from the LVR restrictions:

Previous: Loans to borrowers building a new residence are exempt. The exemption doesn’t apply for a borrower buying a residence where construction has progressed beyond ground works. The exemption applies for borrowers who are owner-occupiers and who are residential property investors

Loans to borrowers building a new residence are exempt.

Change: The loan must be for a residence that has been completed within the previous 6 months and it must be bought from the developer. The exemption applies for borrowers who are owner-occupiers and who are residential property investors. The LVR rules do not prescribe the size of a deposit for new residences.

Previous: Loans are exempt if used for remediation after a fire, earthquake, or to bring a residence up to new building codes. The exemption applies for owner-occupiers and for residential property investors

Change: Loans are exempt if used for remediation after a fire, earthquake, to bring a residence up to new building codes, or to comply with new rental property standards (for example, insulation). The exemption applies for owner-occupiers and for residential property investors

Unchanged: Low-deposit borrowers using the Housing NZ Welcome Home Loan scheme to buy their first home are exempt from the LVR rules.

Links:
Loan:valuation ratio restrictions
Summary of submissions & responses

Attribution: Bank release.

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Changes to LVR restrictions deferred a month

The Reserve Bank said on Friday it was deferring the start of the proposed changes to investor loan:value restrictions (LVRs) nationwide from 1 September to 1 October, based on feedback from banks.

Deputy governor Grant Spencer said: “Banks have indicated through their submissions that more time is required to enable them to meet the new restrictions that apply to investor loans nationwide, given the pipeline of loan pre-approvals made prior to our announcement in July.

“We understand that banks have been applying the new LVR restrictions to new loan applications since the LVR changes were announced. On that basis we will defer the formal introduction of the changes to 1 October in order to accommodate the backlog of pre-approvals.”

Mr Spencer said there had been a number of queries related to exemptions, and said the range of existing exemptions to LVR restrictions would continue to apply under the proposed changes. These exemptions permit the banks to make high LVR loans that would otherwise be limited by the restrictions. Exemptions apply where:

  • Owner-occupiers or investors are constructing or buying a new dwelling (provided the loan commitment occurs before, or at an early stage of, construction)
  • Owner-occupiers or investors require bridging finance to complete the purchase of a residential property on a date before the completion of a sale of another property
  • Owner-occupiers or investors are refinancing an existing high LVR loan, or shifting an existing high LVR loan from one property to another (provided the total value of the new loan does not increase)
  • Owner-occupiers or investors are borrowing to fund extensive repairs or remediation that is not routine or deferred maintenance; this includes events such as a fire, natural disaster, weather tightness issues or seismic strengthening
  • A loan is made under Housing NZ’s mortgage insurance scheme, including the Welcome Home Loans scheme
  • Borrowers with owner-occupied & investor collateral can use the combined collateral exemption to obtain finance up to 60% of the value of the investment properties and 80% on their owner-occupied property.

Mr Spencer emphasised that these exemptions didn’t create an obligation on banks to make such loans: “The banks will still apply their own lending criteria to individual borrowers and may choose to not provide finance in these circumstances or to provide it only at lower LVRs.”

He said the Reserve Bank was still analysing submissions, which closed last Wednesday, and further adjustments to the proposals, including the exemptions, were still possible. The bank expects to publish a final policy position this month.

Under the proposed new restrictions:

  • No more than 5% of bank lending to residential property investors would be permitted with an LVR over 60% (ie, a deposit under 40%)
  • No more than 10% of lending to owner-occupiers would be permitted with an LVR over 80% (ie, a deposit under 20%)
  • Loans that are exempt from the existing LVR restrictions, including loans to construct new dwellings, would continue to be exempt.

Attribution: Bank release.

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Equator Principles introduce green checks on development lending

Published: 15 June 2005


One of the chief causes of complaint about the Resource Management Act, and about regulations generally, is that they hobble development: You can’t do what you want to do, it’s unfair, especially as you could do what you want to do in other countries.



This complaint is quite separate from the issue of compliance costs. It’s about the question of being able to do anything at all, not a matter of determining the price at which you can build.


But the rules of engagement are being changed from a different angle, as British law firm CMS Cameron McKenna has outlined in its latest newsletter.


It points to the Equator Principles for financial institutions as a leveller which will see banks becoming warier of lending on unsound or unsustainable developments – no matter that local laws may be more relaxed at the moment.


Effectively, the principles introduce green checks on lending internationally. As more banks sign up, the standards will spread and lenders will find they have to meet the principles or be shut out of contracts.


“The principles apply to projects anywhere in the world, across any industry sector, if the capital cost of the project exceeds $US50 million or more. Given that this relates to the total capital cost,


as opposed to the loan value, and given the current weakness of the US dollar, this is likely to catch the majority of newly built hotels & leisure facilities,” CMS Cameron McKenna says.


“Banks adopting the Equator Principles are expected to develop their own policies & procedures to implement the principles and to provide loans for projects only if they have been assessed against, and comply with, the principles.”


Many of the processes are familiar for New Zealanders – screening, environmental assessment, including social issues, sustainability, use of renewable resources, waste minimisation, and efficient use of resources & energy.


If the project is in a low- or medium-income country, the environmental assessment will also have to address compliance with, or justify deviations from, applicable International Finance Corp safeguard policies, which provide guidance on issues such as natural habitats, indigenous peoples, involuntary resettlement & cultural sites.


The principles were introduced to the banking world at a meeting in London in October 2002 and the first 4 banks signed up in April 2003. Among the major banks operating in this part of the world, Westpac is a signatory.


But the importance of the principles is more in their effect on development elsewhere in the world, leveling competition with strictly regulated New Zealand.


Websites: Equator Principles


CMS Cameron McKenna


 


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