New lending rules and tax changes effective 1st July
New lending rules and tax changes effective 1st July.
Loan to Value Ratio’s (LVR)’s easing
Debt To Income (DTI) limits introduced
Brightline test reversion to two years
Plus -
Interest deductibility restored incrementally
Depreciation on commercial buildings removed
Here we are, 1st July, day 183, halfway through the year and in a game of two halves the second half promises to be as underwhelming as the first with the Reserve Bank (RBNZ) keeping the Official Cash Rate (OCR) restrictive on the road to 2% inflation and today introducing a few changes that won’t make a huge difference to most with residential investors getting a bit of a boost.
Loan to Value Ratios ( LVR’s ) reset from 1st July 2024
We’ve had LVR’s in place since Oct 2013, introduced due to rapidly rising house prices at the time coupled with an increase in use of low deposit loans which can lead to wreck and ruin in the event the market contracts so some measures had to be put in place to maintain stability … cue LVR’s. These have been sitting around 80% for residential owner occupied and 65% for residential investment property meaning you can borrow up to 80% of the value of a property for owner occupied with the 20% balance required in deposit or equity and 65% / 35% for investors.
In order to maintain overall stability in the financial system the Reserve Bank ( RBNZ ) uses macro-prudential policy tools like LVR’s and DTI’s imposed on trading banks along with ‘speed limits’ that will allow a percentage of a bank’s total loan book to be written as low equity or high LVR loans over and above the standard LVR’s.
As of today, July 1st, these have been eased a bit so in essence -
Standard LVR for residential owner occupied remains at 80% with the speed limit raised from 15% to 20% of a bank’s total loan book that can be written over 80%
Standard LVR for residential investors has eased from 65% to 70% with the ‘speed limit’ remaining at 5% of a total loan book that can be written over 70%.
Anything above standard LVR is considered low equity lending.
These are monitored constantly by banks on a rolling basis but essentially the speed limits are big enough to cater to the share of the market that require low equity / high LVR loans
So what does it mean when we talk about speed limits allowing lending over standard LVR’s, if not standard LVR’s then what does it go to? … We’re talking about exemptions, so then who’s exempt ?
Well first of all you can’t borrow 100% of the value of a property, you just can’t. But you can borrow up to 95% if you’re a first home buyer with a little help from Kainga-Ora, but that’s for another article.
So then for the most part you could potentially borrow up to 90% IF you meet bank criteria such as being an existing customer or if you’re new to bank and they have an appetite for your business or low equity lending at the time of application taken on a case by case basis. Also if you’re buying a turnkey property you can generally have 90% LVR or if you’re building up to 85% for example. If you’re re financing to the same amount from another bank or obtaining bridging finance or portable and ( non-routine ) property remediation then you’re excluded as well. Again its outside the scope of this article to cover all scenarios and they vary between banks anyway so its best handled on a case by case basis.
Low equity or high LVR loans also attract a Low Equity Premium ( LEP ) which varies between banks in the form of either an interest rate margin or fee added that can be capitalised ( added to the loan ) generally in the order of 0.25% if LVR is 80% - 85% or 0.75% up to 90% or 1% up to 95%. If added as a margin this can be removed once LVR’s fall under standard LVR settings either by capital appreciation or principal pay down.
The above applies to restrictions imposed on trading banks by the Reserve Bank ( RBNZ ) and do not apply to non-bank peer to peer lenders who have their own criteria, see me for enquiries on those.
So in general if you can make it under 80% LVR for residential owner occupied or 70% LVR for residential investment then all the better but if not there are still options to make it work as shown above, just give me a call and we can work through it.
Debt to Income Ratios ( DTI’s ) introduced on July 1st July 2024
Introduced effective from 1st July, DTI’s are another macro-prudential policy tool the RBNZ have employed to go hand in hand with LVR’s, this again keeps a cap on lending to mitigate the effects of economic downturn.
To quote the Reserve Bank ( RBNZ ) article “LVRs target the impact of defaults by reducing the amount of potential losses in the event of a housing down-turn while DTIs reduce the probability of default by targeting the ability of borrowers to continue to repay debt. Both act as guardrails reducing the build-up of high-risk lending in the system,”
So in essence with the current lending criteria around Uncommitted Monthly Income ( UMI ) determining the amount of borrowing an individual can service on their income, adding a DTI ratio is in effect just putting a ceiling above the already existing limits that most people won’t touch, so lets have a look at what they are –
Residential Owner Occupied – 6 times gross annual income
Residential Investor – 7 times gross annual income
Importantly this encompasses ALL debt, not just mortgages so as a residential owner occupier on a $100k gross income you could have 6 x or $600k of lending in say a mortgage but if you had a $20k car loan as well you could have a $580k mortgage and a $5k limit on your credit card would see you with a $575k mortgage and a $100k student loan would see you with a $475k mortgage and so on. Income is also assessed from all sources including rental income.
Notwithstanding like the LVR rules above there are ‘speed limits’ allowing 20% of the banks total loan book to be above the standard DTI restrictions for both residential owner occupied and investor lending however the Uncommitted Monthly Income ( UMI ) rules and responsible landing code still apply which ensures in a down turn you are more likely to be able to meet all our commitments, essentially saving ourselves from ourselves.
Exemptions to DTI restrictions include Kāinga Ora First Home Loans, refinancing to the same level from another bank, construction lending and turn-key properties and bridging finance as well as portability and (non-routine) property remediation.
Click here to check out the Reserve Bank ( RBNZ ) article on DTI and LVR restrictions and click here to see a video by the RBNZ on the same subject
So it’s unlikely most people would be affected by DTI limits given the UMI rules typically cap the amount of lending under the DTI settings anyway but in the event it’s not then the 20% speed limit still allows your case to be looked at and stand on its own merits so really, it’s nothing that’s going to stop us doing what we could do otherwise.
Investment property tax updates from 1st July 2024.
Disclaimer: The below 3 articles are tax related which is a specialist subject and outside the scope of advice of Infinance, mentioned only as part of a package of investor related changes effective from today or currently being reinstated or phased out. Please seek professional advice on tax matters from a tax specialist.
Bright-line rules from 1st July 2024
Introduced on 1st October 2015 as a quasi capital gains tax on residential investment property purchased from 1st Oct 2015 and sold within two years with the time frame extended in March 2018 from two to five years then to 10 years in March 2021 ( 5 years for new builds ) and now as at 1st July 2024 is reverted to its original model so as of now, properties sold from 1st July 2024 will be subject to a bright-line test if sold within 2 years of purchasing or building it, effectively releasing the previous 10 year lock in period. Exclusions are your main home, business or farmland. See your tax professional for advise on tax matters.
A bright-line test means any profit on the sale of a property less expenses is added to your assessable income for tax purposes.
Click here to check out an IRD article for more on that.
Residential investment property interest deductibility reinstated incrementally
Effected in 2021 as a means to cool off the then over-heated property market, interest tax deductibility was phased out for residential investments properties which is now being phased back in so currently from 1st April 2024, 80% of interest can be claimed on residential investment property borrowing which will return to 100% from 1st April 2025. See your tax professional for advice on tax matters.
Click here to see an IRD article for more on that.
Tax deductibility on commercial and industrial buildings set at 0% from 1st April 2024
With commercial and industrial buildings considered to have a useful life of 50 years or more there’s been a move by the Govt to set depreciation rates at 0.00% effectively removing depreciation as a tax deduction which was at 2% pa diminishing value ( dv ) or 1.5% straight line ( sl ). Touted as an election campaign and source of revenue to fund other tax cuts, Inland Revenue estimates it will bring in $2.31 billion of additional tax over the 2024 – 2028 period, this will have a significant impact on investors and is worthy of note. See your tax professional for advise on tax matters
Click here to see an IRD article for more on that.