Big loans, big risks

Rachel and Luke Dixon bought at a low point in the market. Photo / Michael Cunningham

Heavily geared property buys are only for brave or invulnerable.

Banks again are offering 95 per cent loans to property investors, but they come with a warning to those who assume they can leverage their way into high returns.

ANZ, ASB and Westpac say they will give loans for investment properties to people with small deposits.

ANZ made the announcement last week, although it comes with the proviso that other borrowing must also be with the bank. ASB had earlier said it would look at each deal on a case-by-case basis, opening the way for 95 per cent borrowing on lifestyle blocks and apartments as well as on investment properties.

Westpac chief executive Peter Clare said his bank allowed certain customers to borrow 95 per cent or more in some cases.

"We have stringent criteria for allowing a customer to borrow that much. We do charge a slightly higher interest rate to reflect that risk."

Many investors buy investment properties by leveraging them against the equity in their family homes. This policy change allows them to do that before they have paid off much of the mortgage on the house they live in.

Business commentator Brian Gaynor said lending practices such as these pushed first-home buyers out of the market as investors often competed for the same properties. And he said although banks might be an investor's friend at present, willing to lend money, that would change if house prices dropped.

"Everyone thinks house prices just keep going up and up but that's certainly not true. House prices can turn around and fall quite a lot."

He said buyers at the moment should be aware that they were purchasing in a relatively heated property market. "If you buy a house for $1 million and borrow $950,000 and then the value of the house increases to $1.1 million, you've tripled your money. That's why when markets go up, people do borrow. They know they can make a huge return but they take higher risks."

But, he said, if prices dropped, people who bought with low equity levels would feel the most pain. "It's like children playing musical chairs. It's fine until the music stops. I'm not saying it will stop but it's a dangerous game to play."

He said the same investor with a $1 million property would be left with a $150,000 debt if prices dropped 20 per cent and they had to sell for $800,000. "Banks who lend 95 per cent will be ruthless. They're not going to say, 'Oh you're a nice guy, just pay us back $800,000'. They'll want the full $950,000."

Mortgage broker Tina Webb said she was excited to hear ANZ was offering investors small-deposit loans. "The more you can borrow from the bank, the better for your cashflow."

She and two others bought a property 12 years ago with a 5 per cent deposit. They have built their equity to 50 per cent and the rental return has risen.

NZ Property Investors Federation president Andrew King said: "When you are so highly geared it doesn't take much of a mistake to wipe out the 5 per cent equity you do have."

Claire Matthews, of Massey University's centre for banking studies, said banks carried most of the risk.

"Owner-occupiers are more reluctant to walk away because it's their home. For property investors, it's a business decision; generally it's easier to walk away if things go wrong."

She said NZ banks were generally good at assessing the risk of borrowers but they were more vulnerable at the 95 per cent level. If something went wrong within a short period, interest would quickly push up the balance owed and legal costs would add to the bill.

"It's very easy, if there's only 5 per cent equity, if things go wrong, to quickly end up in a loss situation for the bank."

But she said demand would drive the offerings. Banks wanted to lend and the market for traditional loans was not big enough.

"To get more money out there, they're doing this."

Historic low interest rates at present may make properties look more affordable than they soon would be, which could also catch out inexperienced investors. Westpac chief economist Dominick Stephens expected interest rates to start rising quickly.

"I don't think today's mortgage rates are sustainable. Perhaps for another year, then they'll rise."

Small deposit paying off

Luke Dixon and his wife, Rachel, became landlords with a 95 per cent mortgage almost by accident.

The couple bought a home in Whangarei four years ago with a 5 per cent deposit, intending to live in it but knowing they may not stay in the area forever. When work took the couple to the Bay of Plenty a couple of years later, they decided to hold on to the property because the rent their tenant was paying was covering most of the mortgage payments.

Dixon said being able to buy with a 5 per cent deposit meant they were almost forced into saving. "It's better than paying rent."

If they had had to save up a bigger deposit, he is not sure they would have got there.

"I would have just spent money on boats."

He said he could see how buying with a small deposit could be problematic for investors. "If you're buying to rent out and prices drop and you lose rental income, it could be bad."

Dixon said the property was bought at a low point in the market and the price had not fluctuated much. The couple's loan is with ANZ.