First time buyers can apply for a Welcome Home Loan. Photo / Doug Sherring
Rules are made to be broken. So goes the old adage. So anyone who thinks they can't buy a home because of the Reserve Bank of New Zealand's (RBNZ) loan to value (LVR) restrictions should read on. There are ways around these rules.
That means despite popular beliefs most home buyers are limited to 80 per cent loans (70 per cent for investors in Auckland), some are still buying with a 10 per cent deposit and in extreme circumstances 5 per cent deposits as they did in the bad old days before the Global Financial Crisis.
There are reasons why buyers shouldn't buy a home with less than a 20 per cent deposit. In the case of a market downturn, and they happen, they could end up in negative equity -- making it harder to sell. It does happen.
The RBNZ's measures were introduced to quell what the Government saw as an overheated property market that is a threat to both buyers and the country's financial system.
There are three main restrictions on buyers under the RBNZ's LVR rules. Those restrictions are:
• Owner-occupied homes in the Auckland council area. Banks can only lend above 80 per cent on a property for 10 per cent of their new lending.
• Auckland Investors. Only 5 per cent of new lending by banks can be for more than 70 per cent of a property's value.
• Elsewhere in New Zealand. Banks are only allowed to lend more than 80 per cent on 15 per cent of new lending.
The first thing to be aware of is that banks can lend more than the 70/80 per cent limit for a percentage of their new loans. That means there are first time buyers, investors, and other purchasers who are borrowing more than 70/80 per cent.
The next important point to note is the word "banks". The rules don't include credit unions, building societies, and other non-bank lenders such as General Finance, Resimac, Liberty Financial and First Mortgage Trust.
That said, credit unions and building societies are customer-centric and won't lend to people who they think can't afford to repay. Non-bank lenders are often used by borrowers with blighted credit records as a way of getting onto the housing ladder. Banks must err on the side of caution when lending to such people. The non-bank lenders are seeing some LVR restriction refugees heading their way as well as this traditional market.
Non-bank lenders often charge more than the banks in fees and interest rates. But if it gets your foot in the door and the house price rises above the RBNZ restrictions, then it's possible to remortgage later with a bank at a lower rate.
Another trick for first time buyers is to apply for a Welcome Home Loan, which only requires a 10 per cent deposit. Kiwibank and some credit unions offer these loans, but there are maximum combined income and house price caps, which knock a lot of first time Auckland buyers out of the running.
Another option for LVR-hampered buyers is a new home or apartment. The building industry successfully lobbied the RBNZ to exempt new homes (and apartments) from the LVR restrictions. But banks typically won't lend more than 70/80 per cent anyway on an apartment although they might on a new build.
There are other exemptions from the LVR rules for square pegs that don't fit in round holes. For example investors who need loans secured against both investment and owner-occupied property may have some leeway with the bank.
And borrowing to build "granny flats" for extra income is often considered as a construction loan and is usually exempt from the rules. In cases such as the granny flat, the bank must determine whether the structure will be a "residential dwelling".
Other types of loans that might be exempt in some circumstances include:
• Top-ups for some non-routine building repair work such as fixing leaky homes
• Bridging loans
Details of these and other exemptions can be found at http://tinyurl.com/RBNZexemptions
Owners of existing homes who want to extend the mortgage for renovations, holidays, cars, to buy an investment property or other reasons need to be aware that LVR restrictions do relate to them. They can't top up to greater than 70/80 per cent on their investment properties or homes.
If the loan is for a small business it may still fall under the rules depending on whether the bank classifies the loan as residential or business. Often small business owners are forced to borrow against their house as security. If this is the case, the LVR rules apply.