New loan rules snare bridging finance: Twyford

Mortgage Express wants clarification on new loan to value ratio rules. Photo/Dean Purcell.

Labour housing spokesman Phil Twyford has called for a bank lending loophole to be closed, saying it is accidentally capturing people applying for bridging finance.

Twyford backed this week's call from Mortgage Express, owned by Harcourts, saying homeowners seeking bridging finance were being accidentally hooked by new 40 per cent loan to value ratio requirements.

Twyford said the issue needed sorting out because the loophole in loan to value ratio mortgage restrictions was stopping homeowners from buying new houses before they sell their old one.

"It means homeowners who need bridging finance between selling their old home and buying their new house are treated as investors because they effectively own two houses for a short amount of time. This means they are required to meet the new 40 per cent LVR requirements," Twyford said.

The Reserve Bank has refused to react to the Mortgage Express statement out this week.

A BNZ spokesperson confirmed there was an issue.

"We are working with the Reserve Bank as part of the consultation process to look at these kinds of scenarios and how they might be best managed. The scenario that has been painted is not one that has caused issues for us at BNZ, but may highlight the potential for differing interpretation by the various banks. The current consultation period on the recent LVR changes has yet to run its course, and we expect RBNZ will look to clarify some areas of the proposed policy further," the BNZ spokesperson said.

Bruce Patten of Loan Market, consulted two other major banks on the issue and confirmed that what Mortgage Express had said in its statement was correct.

Patten said three key changes coming into effect from September 1, although the majority of banks have been encouraged to implement these changes as soon as possible and many of them have done so.

Patten said the key changes from September 1 were:

1. No more than 5 percent of all bank lending to residential property investors will be allowed with an LVR greater than 60 percent (that's a deposit of less than 40 percent).

2. No more than 10 percent of all lending to owner-occupiers will be allowed with an LVR greater than 80 percent (that's a deposit of less than 20 percent).

3. Loans already exempt from the existing LVR restrictions, for example loans to construct new dwellings and 'dollar-for-dollar refinances', will continue to be exempt.

"Residential mortgages make up 55 per cent of all assets in the banking system, which is seen as an increasing risk to New Zealand's financial stability. Investment lending is increasing rapidly, contributing to the strength of the market but attracting a higher risk. The RBNZ believes we need to lessen that exposure for long term financial health," Patten said.