Don't expect banks to loosen lending anytime soon
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Articles by Kris Pedersen
As investors become increasingly aware of how much the lending landscape has changed from that of a few years ago, a question I am receiving a lot is, “When will we see the banks relax mortgage lending criteria again?”
Whilst we saw the slight relaxing of LVR restrictions at the start of the year, over roughly the same period we have also seen:
• Debt servicing restrictions continuing to tighten with an emphasis on lenders assessing all of clients’ mortgages on high interest rates (7-8%). This means that lending guidelines are quite distorted when compared with the actual performance of a property portfolio.
• Interest-only loans getting harder to access and frequently banks are refusing to roll over for new periods when an existing period comes up for expiry. Many investors will not have felt the impact of this yet. However, when combined with the general increased costs of being a landlord, we expect to see more investors coming under cashflow strain over the next few years.
• The Royal Commission in Australia looking into misconduct in the financial services sector – in particular, poor lending practices and the lack of emphasis banks placed on customers’ expenses when assessing loan applications. There was a flow-on effect of this in New Zealand.
• Debt servicing restrictions continuing to tighten with an emphasis on lenders assessing all of clients’ mortgages on high interest rates (7-8%). This means that lending guidelines are quite distorted when compared with the actual performance of a property portfolio.
• Interest-only loans getting harder to access and frequently banks are refusing to roll over for new periods when an existing period comes up for expiry. Many investors will not have felt the impact of this yet. However, when combined with the general increased costs of being a landlord, we expect to see more investors coming under cashflow strain over the next few years.
• The Royal Commission in Australia looking into misconduct in the financial services sector – in particular, poor lending practices and the lack of emphasis banks placed on customers’ expenses when assessing loan applications. There was a flow-on effect of this in New Zealand.
Regarding the last point, my team and I personally experienced severe tightening with one of the major banks recently, as loan assessors reported back to us that they are getting told to look much more closely at applications in general.
On the flipside, this is creating opportunities in the burgeoning non-bank market, with many of the lenders we deal with stating large increases in mortgages being written. While in most cases these lenders are charging a premium on what you’d pay if you could have accessed the finance through a mainstream lender, the fact that often these lenders seem to operate with a higher degree of common sense, innovation and lack of fishhooks, shows that this segment will only continue to grow in market share. There is still more funding required for reasonably priced longer-term requirements in this space but there are signs that this is starting to come. Several operators have introduced prime versions of products in recent months with rates significantly beneath those of their traditional offerings.
The one area where relaxing may apply shortly is the increasing talk that we will see a further pulling back of the LVR restrictions late this month when the Reserve Bank does its next Financial Stability Report. ANZ, BNZ and Kiwibank economists have all stated that they expect this to eventuate with a likely increase in the investment space back to 70%. The positive is that even if it doesn’t eventuate then, we are very likely to see it announced in May next year at the following review.
Unfortunately don’t expect to see other relaxing in Bank Land any time shortly.
On the flipside, this is creating opportunities in the burgeoning non-bank market, with many of the lenders we deal with stating large increases in mortgages being written. While in most cases these lenders are charging a premium on what you’d pay if you could have accessed the finance through a mainstream lender, the fact that often these lenders seem to operate with a higher degree of common sense, innovation and lack of fishhooks, shows that this segment will only continue to grow in market share. There is still more funding required for reasonably priced longer-term requirements in this space but there are signs that this is starting to come. Several operators have introduced prime versions of products in recent months with rates significantly beneath those of their traditional offerings.
The one area where relaxing may apply shortly is the increasing talk that we will see a further pulling back of the LVR restrictions late this month when the Reserve Bank does its next Financial Stability Report. ANZ, BNZ and Kiwibank economists have all stated that they expect this to eventuate with a likely increase in the investment space back to 70%. The positive is that even if it doesn’t eventuate then, we are very likely to see it announced in May next year at the following review.
Unfortunately don’t expect to see other relaxing in Bank Land any time shortly.
Kris Pedersen
Kris Pedersen Mortgages
© Gilligan Rowe & Associates LP
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Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.
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