Reserve Bank changes

The Reserve Bank has made a few changes lately. We feel that two aspects of these changes should have an immediate impact on home buyers.

Exemptions for New Home buyers

Apart from the “Welcome Home” buyers exemption which has allowed us to approve some 90% lending to clients on regular incomes, there is now a further new exemption to help home buyers.  In particular, the Reserve Bank proposes to exempt any residential mortgage lending “to finance the construction of a new residential property.” Reserve Bank Paper

What does this mean?

Under the proposal, lending with a deposit of less than 20% will be  possible for clients who are constructing or buying a new home.

Who can use the new exemption?

1. Someone buying from a builder. The reasoning for this exemption is to ensure the Reserve Bank LVR restrictions do not result in less houses being built. So the buyer must make a financial and legal commitment in the form of a purchase contract before construction has begun. Payment may be made in stages or in one lump sum at the end of a project. Services could be provided to the section prior to a buyer being found.

2. Someone who is buying land and building on it. We note that at present most banks require a 20% deposit before lending for a land purchase and only a couple of banks will entertain a construction project with less than a 20% deposit. Westpac are able to look at applications with a 10% deposit for a construction project when building is to be done with a full fixed price contract. (other conditions apply)

Who cannot use the new exemption?

1. Someone seeking a loan to buy a section with no immediate plans to build.

2. Someone seeking a loan to buy a section and to move a house onto it.

Please note that banks are lending outside of these rules for certain clients, call me first if you have a specific scenario you would like to discuss.

Investors with 5 or more houses

The Reserve Bank has also made some decisions on its review of bank capital adequacy requirements for housing loans. Of importance is its decision on the number of properties a client would have with a bank, before the lending should be considered to be for “corporate property”. This may affect the cost to a bank of funding this type of a client. The RBNZ has stated that anyone with 5 or more houses should be treated as a small business owner.

We are unsure of the actual effect on pricing this will have,but note that:

–  currently commercial property loans are priced anywhere from .5 -1% higher than residential property loans; and

– generally banks will lend approx 65% over a 15 year term with any amount greater than 65% placed on a shorter term.