Reserve Bank looks at rental property investor rules

The Reserve Bank is looking at tightening up on how much banks can lend to residential landlords. 

The central bank has confirmed it is consulting on new rules for residential property investors, opening the door to new requirements for owners of rental properties.

After months of of speculation, the Reserve Bank said it was looking at creating a "new asset class treatment for mortgage loans to residential property investors" within its capital adequacy requirements.

The issue of residential property is increasingly political, with critics claiming the loan to value ratios established by the bank last year may have made it harder for first time buyers to get on the property ladder, but not for those with a portfolio of rental properties.

The bank said consultation would run until April 7.

The initial aim is to get views on how "to best define a property investment loan."

Proposed changes were to make sure that banks hold enough capital for the risks involved in investment property loans and would bring New Zealand into line with international lending rules, the Reserve Bank said.

Reserve Bank Head of Prudential Supervision Toby Fiennes said today: "International evidence suggests that default rates and loss rates experienced during sharp housing market downturns tend to be higher for residential property investment loans than for loans to owner occupiers."

Once the Reserve Bank has settled upon a definition of property investment loan, it proposes to change existing rules by requiring all locally incorporated banks to include residential property investment mortgage loans in a specific asset sub-class.

The banks would need to hold "appropriate regulatory capital for those loans".

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The Reserve Bank has previously consulted on a possible definition that would have seen loans to borrowers with five or more residential properties classified as loans to residential property investors.

Partly as a result of submissions received, the bank has reconsidered the definition.

It is now consulting on three possible alternative ways to define loans to residential property investors:

- If the mortgaged property is not owner-occupied; or

- If servicing of the mortgage loan is primarily reliant on rental income; or

- If servicing of the mortgage loan is at all reliant on rental income.

Most landlords only own a couple of properties.

Commentators have been expecting the rules on lending to landlords to be tightened.

Last month, NZIER said it expected the Reserve Bank to unleash more controls on bank lending, known as "macro-prudential" tools, to dampen a superheated Auckland housing market.

The central bank said that while it was not a macro-prudential policy proposal, creating consistent asset class groupings to be used by all banks would help the Reserve Bank to implement targeted macro-prudential policies in the future, should that become necessary.

At the end of 2013 the Reserve Bank imposed speed limits on low deposit loans.

Earlier this year, commentators had expected an announcement on new rules for banks lending to investors who own several houses. The rules were meant to be introduced in June last year but were delayed.

Under such rules, owners of multiple properties could be treated like small-business owners, forcing banks to hold more capital as a buffer to cover their lending.

For property investors, it could mean higher equity requirements next time they bought a house.

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 - Stuff


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