The Reserve Bank (RBNZ) has introduced new rules that will come into effect on the 30th of June this year. These mean that rental property owners with five or more properties are to be classed as either income producing real estate or small to medium enterprises (SMEs).
This reclassification may lead to higher equity requirements and mortgage interest rates for affected rental property owners.
Further background information was provided in our last newsletter and you can view that here. Since publishing that newsletter, more information on the policy change has come to light.
1) A loan may not be classified as a residential mortgage loan if:
a) The bank is aware of more than five properties owned and let by the borrower directly or through a company or any other ownership structure of the borrower.
b) The loan is predominantly serviced from the rental income those properties generate.
2) The RBNZ stipulates that such loans should be classified as either income producing real estate or SME retail lending.
3) Banks are also required to verify whether the customer has any other rental properties or residential mortgage loans with other lenders as part of its credit origination process.
This confirms that private residences, baches or other secondary dwellings that aren't rented out do not count as part of the five plus properties.
These clarifications also show that different ownership structures and spreading loans through different banks will not be affective strategies to avoid loans being classified as non-residential.
What isn't certain is why the RBNZ has chosen now to make these changes. It is interesting that they were made as part of the Banks LVR restrictions. These restrictions mean that banks cannot lend any more than 10% of their new residential mortgage lending to low deposit lenders. There were some media reports that this could lead to banks favouring property investors for low equity loans over home owners. Perhaps this reclassification policy is to make it easier for low deposit home buyers to secure loans.
The NZPIF tried to establish from the Reserve Bank how rental property owners will be affected, but they claim they do not know as different banks will form different policies in reaction to the policy change.
Banks are also reluctant to provide advice as they are waiting for final confirmation from the RBNZ of how the new policy will work.
Hannah Kite, who used to work with the Reserve Bank, is an Associate with Christchurch firm Murray & Company Wealth Management Limited. Hannah says rental property owners with five or more rental properties could confirm if their current loans are already classified as non-residential. If this is the case then potentially nothing will change for them. However Hannah says "it may well have to be considered by the bank on a case by case basis".
If your loans are currently classed as residential but the number of properties you own sees you fall under the new policy, contact your lenders and ask what your situation would be if your loans were reclassified as non residential.
"If it were me, I would be speaking to my bank and looking at how I would be affected if I were to be treated as a small business when policy comes into force" says Hannah. "I would then make contingency plans in this regard".