Banks Working Against Each Other

“The NZ Property Investors’ Federation (NZPIF) is concerned that the Reserve Bank of NZ (RBNZ) and the trading banks are currently working against each other”, says Sharon Cullwick, NZPIF Executive Officer. “On the one hand the RBNZ is considering lifting the LVR restrictions to stimulate the economy and on the other the trading banks are testing borrowers on virus-constrained income and using high serviceability tests thus making the obtaining of loans more difficult and working against the RBNZ.”

The proposed lowering of the loan to value ratio for property purchases will mean a smaller than 20% deposit may be required, allowing more people to qualify for property purchases. However, banks each have their own requirements when it comes to testing the borrowing capacity of individual clients seeking a loan and some of these have not changed since Covid -19 effected the economy.

The result is that banks are still applying high serviceability tests which will stop some people from securing a loan. These serviceability tests normally calculate whether a borrower can afford the repayments on a loan after their expenses and income are taken into account. In December 2019 the test rate was as high as 7.5% with no sudden change in this rate since Covid-19 came about. It also means that, some loans, which were approved prior to the lockdown, are now being revisited and, in some cases, have been declined.

Even with the reduction of interest rates, securing finance is as difficult as ever. Some banks are requiring at least 60% LVR for ‘new to bank’ customers regardless of their financial situation and refusing to take on new customers who are seeking a loan either for an investment property or for a purchase as an owner occupier. Banks have mostly now removed the higher interest rate which was charged for the purchase of investment properties compared to that charged for purchases by owner occupiers and have significantly reduced their cash bank offers. However, it seems like banks have gone in to a holding pattern to see what the full effect of the mortgage deferral will have on some customers and then will re-evaluate their complete portfolio.

“All of these constraints have and will continue to delay home purchases, new buildings and are stalling the market even if the Reserve Bank reduces LVR restrictions”, says Cullwick.

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