Landlords face bank clampdown
Landlords with mortgages on five or more houses will soon officially be classed as "small business owners" - opening them up to closer scrutiny and higher expenses.
The new rules, introduced by the Reserve Bank, come into force on June 30 this year.
Commercial borrowing is usually more expensive than retail, as banks have to hold significantly more capital against the loans. The amount of capital banks are required to hold is based on a percentage of the assets, which are weighted by how risky they are. For example, the risk weightings on BNZ's commercial property loans start at 70 per cent, roughly double the 30-40 per cent weighting on a home loan.
Squirrel mortgage broker John Bolton said investors buying residential properties were generally treated as retail customers at the moment, even if they were assigned a business manager. That gave them access to all the "sexy rates" and specials, like help with legal costs, cash offers, and discounted interest rates.
It was usually only those borrowing a total of $2 million to $3m who were bumped into the commercial category, although the thresholds varied between banks, he said.
"At that point they're really saying ‘you're a business - and we're going to treat you as such'."
Bolton said the Reserve Bank's attempt to standardise lending standards could lead to a return to the 1980s-era style of putting property investors in a distinct class of their own.
"You'll definitely see split pricing," he said.
"Because the profitability for that portfolio will start to look
quite different, there's a higher cost for [banks] . . . so you will see that reflected in the pricing."
Bolton said commercial borrowers could expect to pay roughly 50 basis points of extra interest, as well as face greater scrutiny and sometimes higher fees.
However, it's also possible that the new rules will end up having little or no effect on the status quo.
Submissions to the Reserve Bank suggest investors will split their holdings between different banks to avoid being classified as commercial borrowers.
"Unless the Reserve Bank takes a holistic approach across all properties the person owns, it's not going to work," said Bolton.
He said splitting between lenders was already a common practice anyway, as investors didn't like one bank having total control over their portfolio.
"Having it all with one bank is easier, and maybe you'll get better pricing - but it's also risky," said Bolton.
The changes were detailed in a final policy document published on the central bank's website in December, and are likely to take thousands of property investors by surprise.
ANZ's 2013 Property Investor Survey, released late last year, found 50 per cent of those surveyed owned four or more properties.
New Zealand Property Investors' Federation president Andrew King was unaware of the changes when first contacted by the Sunday Star-Times.
While it could be a hassle and costly to change lenders, King said it would still be simple enough to skirt the rules.
"It would be very easy to get around it. You could even set up different entities; trusts and companies," he said.
"It'd be very hard to prove something like that."
As a result of feedback from submissions, the Reserve Bank decided to put more emphasis on the income source used to service home loans.
But it kept the count-based threshold, saying in its view anyone with five or more properties "should be treated as running a small business".
"To avoid further confusion, this would mean treating those loans as corporate property loans," the paper reads.
The final policy decision has already been made, with a last round of consultation on adding the changes to the Banking Supervision Handbook now under way.
Sunday Star Times