Mum and Dad property investors could be hit by the next raft of clampdowns on mortgage lending from the Reserve Bank.
Anyone with five or more rental properties is likely to be treated as a commercial real estate investor by banks, and would have to pay commercial interest rates and have to stump up a higher deposit. The proposed changes come as the Reserve Bank tries to reduce risk to banks in the property sector and may be in place as early as July 1, they follow changes to the rules on how much first-home buyers can borrow, introduced in October. Those changes have been credited with taking some heat out of the housing market, but also shutting first-home buyers out of the market.
Investor groups say the proposed commercial investor policy would hurt smaller players, lead to rent increases and dent the housing market. Commercial borrowing rates can be three or four percentage points higher than residential rates, although the exact figure varies depending on business circumstances, deposits often have to be a minimum of 25 per cent of the sum borrowed, compared with 20 per cent for residential borrowers.
The Reserve Bank says in its policy decision on the proposed change that it is “of the view that anyone with more than five properties, regardless of whatever other income sources or revenue streams exist, should be treated as running a small business”. There is no threshold at present on who is considered a commercial investor.
Wellington Property Investors Association president Jackie Thomas-Teague said the change would have an impact on smaller investors, as commercial rates would be unaffordable for them. While anyone who had five rental properties should be taking it seriously as a business, it would be wrong to treat them all as if they were major property investors. “I would be losing money hand over fist” paying commercial rates, she said, “If they do this, rents would [have to] rise to make investments worthwhile, or the bottom would drop out of the investment market and, by extension, the property market.” House rentals typically brought a return of less than 7 per cent, she said, so if interest rates on mortgages were higher than the return, investors would be making a loss from day one.
The change would favour already wealthy investors, who could afford to buy multimillion-dollar commercial properties offering 15 per cent returns, but those who bought smaller would be shut out, she said.
Banks decide for themselves who qualifies for different types of loans. Because there is no one criterion for determining who is a commercial investor, the Reserve Bank says it does not know how many people could be affected by its plan. Spokesman Angus Barclay said the intention was to reduce the risk to the financial system from the property market, as it had already done with loan-to-value ratio restrictions for residential mortgages. The LVR limits would still apply to people who owned more than five residential properties if they were to buy a home, Barclay said.
“There needs to be a clear distinction between residential mortgage loans and other types of loans. They’re different types of lending and pose different levels of risk . . . this will help the ongoing stability of New Zealand’s financial system.”