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This blog is proudly brought to you by the letters D, T, I, L, V, R, and the words "Bright, Line, and Rules."
The 1st of July 2024 will bring some regulatory changes that may affect you as a potential purchaser or seller of property. Let me summarize, but it is crucial to note that you must seek personalized advice from the appropriate professional before making any decisions about buying or selling property. The information below is intended only as a general summary of the changes.
From the 1st of July, banks will be limited to lending a multiple of the borrower's income, based on a Debt to Income Ratio (DTI).
For those buying an owner-occupied house, the maximum is 6 times the income, and for investors, it is 7 times the income.
However, relax! Given the current high interest rates, banks are lending less than that now anyway, so as of the 1st of July, it is unlikely you will notice a difference in the amount of money you can borrow from a bank. When rates drop, however, this will mean there won't be much more money on offer (which is the point of the regulation, as it is designed to take some of the "heat" out of the market when interest rates drop). When interest rates reach around 5%, we will start to see banks limiting their lending based on the maximum DTI, rather than their current calculations (based on the interest 'servicing rate' that is around 9% right now).
Some details for those that are interested:
"Income" is calculated as your gross income or business net profit and includes any gross rental income you receive.
"Debt" includes all current debt (such as car, personal loans, student loans, existing home loans) as well as credit card limits—these are included in the calculation with the new debt.
There is an exemption to this rule (among other things) when buying new rental property.
The banks have some flexibility and can approve a percentage of loans that don't fit the DTI criteria (it is safe to assume that this will be the exception to the rule—so I wouldn't count on getting these approved).
For those who are really interested in the detail, read the Reserve Bank information.
Along with the new DTI rules, as of 1st July, the Reserve Bank is loosening the LVR (loan to value ratio) rules banks can lend at.
In short, a higher percentage of the loans to "Owner Occupied Houses" that banks approve can be above 80% LVR (i.e., lending to those with less than a 20% deposit). Currently, 15% of the bank's lending can be over 80% LVR, but this is increasing to 20%. In time, expect it to be slightly easier to secure loans if you don't have a 20% deposit.
As of 1st July, banks will be able to lend to investors up to 70% LVR (currently, it is 65%). So, if you want to buy a rental property (or "top up" a loan against a rental property), you can expect slightly more lending to be approved (all other factors remaining equal). Do note that the banks don't have to approve loans at these new ratios, and at the time of writing (in mid-June), banks haven't communicated if this new policy will be implemented on 1st July or not. Based on the implementation of previous changes to the LVR, we are expecting them to make this change as soon as they are able, but we wait and see.
For those uninitiated, the Brightline Rule is a form of capital gains tax for those selling investment property. The required holding period to be exempt from this rule has extended from 2 to 5 to 10 years over time.
As of 1st July 2024, the holding period is back to two years. In short, if you have held a rental property for more than 2 years, you won't need to pay tax on the gain.
Please talk to your accountant before deciding to sell, as it is important to ensure you and your tax professionals are clear on your specific situation before making any decision.
The impact of this change? There may well be a significant number of investors who decide to sell their property from the 1st July. A combination of this regulatory change and the changing tax deductibility laws on interest for rental properties may see many would-be property investors looking to re-enter the market. If you then add decreasing interest rates to the mix, it would not be surprising to see a swing back to property investment in the coming months.
You’ll find more details on the Brightline rule changes via the IRD.
As always, make sure you get professional advice when making decisions around buying and selling property – this includes your lawyer, accountant and insurance broker and financial adviser. If in doubt, give us a call. We are happy to talk you through the changes and what that means for you.
Brendon.
Brendon Ojala (FSP119244) is a Financial Adviser with Velocity Financial (FSP95466). No investment decision should be taken based on the information in this blog alone. Please see Brendon’s disclosure statement on our website.
About Brendon:
Hi, I'm Brendon, one of the owners and advisers at Velocity Financial. I have been giving advice on mortgages and insurances at Velocity for around 15 years, and it is great to be able to work with people to achieve their financial goals. Prior to giving money advice I worked as a youth worker and managed teams for a not for profit organisation. I live with my wife and one of my sons (the other one only stays when he needs food) in Berhampore, and if I'm not talking revolving credit accounts I can be found running the trails of Wellington.
Always get professional advice
The information shared in this post is meant to be general guide to support you on your journey. When making important decisions about your finances, we encourage you to seek independent financial advice first, tailored to your unique situation. As well as talking with a financial adviser, make sure you talk to your lawyer and accountant too – together they'll help you find the best solution for your specific situation. Our knowledgeable financial advisers are here to help. Check out our website for the details about our financial advisory services in our disclosures https://www.velocityfinancial.co.nz/disclosure-statement.