The "most draconian piece of legislation" adviser has ever seen

In New Zealand, a shift in power isn’t just about who sits in parliament. It’s a ripple that travels far and wide, impacting everything from education to healthcare. But perhaps no industry feels the tremors quite as acutely as the mortgage industry.

As Kiwis navigate the ever-changing landscape of home and business financing, mortgage advisers are the ones on the front lines. They witness firsthand how tweaks to policy, introduced by a new government, can turn the well-oiled machine of mortgage lending into a system with a few loose cogs.

“There’s a lot of stuff going on in the industry – both good and bad,” said veteran mortgage adviser Jeff Royle (pictured above), business owner at iLender. “We are an industry in flux.”

“There are so many moving parts it feels like a complex machine with lots of little cogs. It’s all turning over just fine until suddenly you jump a cog, and you think, ‘how’s this going to impact the machine?’”

Despite the occasional hiccup, Royle remains cautiously optimistic. “So far, the mortgage machine seems to be moving in the right direction at least,” he added.

But six months into a new term, the question remains: will the current momentum be maintained, or will the gears of change shift the entire system in a new direction?

The bright-line test cog: A win for investors

Over the past decade, perhaps no other cog in the mortgage machine has been turned and twisted more than the bright-line test.

Introduced in 2015, the bright-line test in New Zealand is a time-based rule that taxes profits made when selling a property within a set period, acting as a simplified way to capture capital gains tax on short-term property flips.

At the time, sellers would be taxed on property sales within two years of purchase. This was extended to five years, then 10, and has now returned to two years again becoming law April 1.

While Royle still views the bright-line test as a “blunt instrument”, he said the decision to cut it from 10 to two years was a positive move.

“Big win for investors there - they’ve brought back tax deductibility on their mortgages,” he said. “This makes property investment more attractive again, offering better cash flow for investors to jump back into the market.”

Royle said the latest iteration was much needed, because New Zealand has had a huge influx of migrants.

“Problem is, many of them can’t actually buy property yet. So, the demand for rentals, especially in Auckland, is off the planet,” he noted.

Royle said this was a side effect of the previous government’s policies, tinkering with the mortgage machine that was still on the move.

“A lot of investors either stopped buying altogether or decided waiting was the smarter move. It just wasn’t financially viable for many mum and dad investors to stay in the game,” Royle said.

“The result? Fewer rental properties available, skyrocketing demand, and rents going through the roof – classic supply and demand at work.”

The CCCFA cog: A useless part?

Another quick pit stop to the mortgage machine has been the changes to the Credit Contracts and Consumer Finance Act 2003 (CCCFA).

While the CCCFA is over 20 years old, it regained attention in 2021 after the Labour government updated it to tackle issues related to loan sharks and predatory lending practices.

Royle called it a “disaster” and the “most draconian piece of legislation” he had ever seen.

“It wasn’t designed for the purpose it claimed. They wanted to stamp out loan sharks and that kind of malarkey, and rightly so. But the wording was so terrible, it ended up affecting regular lending,” he said.

“People were getting declined for things like having too many flat whites, buying their kids Christmas presents, or even going to the gym too often… it was ridiculous.”

With banks facing heavy fines and bankers even facing personal liability, lending became much more cautious, approving fewer loans. This stricter approach sparked criticism from the industry.

This was until the current government pledged during the election to wind back Labour’s changes and fast-tracked the reforms in April.

While Royle welcomed the latest change compared to the previous policy, he has a better idea: “get rid of the bloody thing altogether.”

“We already have responsible lending laws in place, brought over from Australia in June of 2015,” he explained. “I’ve been in this industry a long time in New Zealand, and I’ve never seen any evidence of lenders acting recklessly. It’s like fixing a problem that doesn’t exist.”

“They’ve watered down the CCCFA four times now, three times under Labour and once under National. Enough is enough.”

Royle said the mortgage machine already has enough checks and balances in place.

“No lender wants to give someone a loan they know will end up in default,” he said. “That’s bad business and a PR nightmare. You wouldn’t go into any relationship thinking that way, would you?”

RBNZ’s cogs: DTI, LVR, and interest rates

The Reserve Bank of New Zealand (RBNZ) also plays a crucial role in the mortgage machine, wielding influence over several key cogs: loan-to-value ratio (LVR) and debt-to-income ratio (DTI) restrictions, and interest rates.

The LVR cog: A helping hand for first home buyers?

In New Zealand, LVR restrictions have been an effective method for RBNZ to control the heat of the property market.

When the market was too hot like in 2013, the RBA tightened the LVR cog to restrict the number of higher risk borrowers accessing lending. When the market has cooled, like in 2018, the central bank relaxes the measures until demand reaches a desired equilibrium.

Now, there’s speculation that the RBNZ might “loosen the reins a bit”, according to Royle.

“Lenders can go up to 15% of their books at over 80% LVR. It’s pretty easy for the banks to tweak that, they just went from 10% to 15% a year ago. They might go as high as 25%, but I’m leaning towards 20%,” Royle said.

“That would open things up for first home buyers. There’s definitely demand. If they want to help first home buyers, that’s probably the easiest tool in their toolbox.”

The DTI Cog: A blunt instrument on standby

Unlike some countries, New Zealand hasn’t historically relied on debt-to-income ratios to restrict lending.

Royle said there’s good reason for that.

“I work with them in Europe and the UK, so I’m used to DTI, and let me tell you, they’re brutal,” he said. “A real blunt instrument.”

However, in order to reduce the effect a low interest rate environment could have on the market, like what was experienced in 2021, the Reserve Bank has indicated it will bring in some restrictive DTI measures this year.

For now, at least, Royle said the changes are unlikely to have much of an effect.

“Really, DTIs won’t kick in until interest rates drop below 5% and as much as we’d like to see that, I don’t see it happening anytime soon,” he said.

“It’s the LVR changes that will become important for first homebuyers.”

The interest rate cog: A market-RBNZ tug-of-war

Interest rates are another major factor influencing borrowing costs. Currently, the market is pushing interest rates down, while the RBNZ tries to maintain them to control inflation.

“I think the market will win,” said Royle, “and I think we’ll start to see rates drop. We’re already seeing some of the rates being pulled back.”

“My prediction is I think we’ll see the OCR drop by at least 50 basis points in the next 12 months.”

While the market and the media may “bang on about interest rates”, according to Royle they aren’t as important they are made out to be.

“We’ve got an interest rate obsession in this country,” he said. “Yes, they are an important part of the equation, definitely. But they are only lone part of the equation.”