Financial educator discusses pros and cons
From a homebuyer and investor perspective, there are pros and cons to the proposed changes to loan-to-value ratio restrictions, a financial educator says.
On the one hand, they provide the opportunity to enter the property market sooner, but as a smaller deposit equates to a bigger mortgage, borrowers pay more interest over the longer term.
The Reserve Bank of New Zealand is consulting with registered banks on changes to loan-to-value ratio (LVR restrictions), put in place in November 2021.
The changes would see the share of total bank lending to low deposit owner-occupiers (LVR above 80%) increase from 10% to 15%, effective from June 1. For investors, the 5% bank lending limit would include lending with an LVR above 65% (currently 60%).
Financial educator and owner of Acumen Group Lisa Dudson (pictured above) told NZ Adviser that in theory, with a greater share of bank lending available to people with low deposits, more New Zealanders would have the opportunity to buy their own home.
Along with rising interest rates and CCCFA changes (modified from May 4), saving a standard 20% deposit remains one of the biggest stumbling blocks to homeownership, she said. According to CoreLogic New Zealand December 2022 figures, based on the nationwide property value, it takes an average of 10.4 years to save a 20% deposit for a first home.
“I think people could do more here in terms of having a stricter budget and making more sacrifices to save for their deposit, i.e. making it a priority rather than mainly relying on KiwiSaver,” Dudson said.
The downside of a lower deposit is higher borrowings, which Dudson acknowledged means more interest is paid over the longer term. With the official cash rate at 5.25%, the cost of borrowing has become more expensive.
While house price growth has declined year-on-year, CoreLogic April figures show that the pace of monthly declines has slowed, indicating values in the current cycle may be close to the bottom.
“In my opinion, it is better to have a higher deposit – but there is a trade-off in not being able to buy while saving,” Dudson said.
While the proposed LVR changes to investor lending means that less equity or cash would be required, whether this would help investors remains to be seen, she said.
Along with higher interest rates, phased out tax deductibility on rental properties represents a significant cost to investors. While the proposed LVR changes would make the equity side of borrowing slightly easier, cash flow can still be an issue, Dundson said.
“Financing is tough … property investors are very cautious at the moment and mainly still sitting on the sidelines."
Newer investors tend to pay heed to market commentary and are more likely to wait until there are clear signs of recovery, she said. Larger, more experienced investors are looking for opportunities to buy, and as they’re often better funded, borrowing is generally easier, she said.
Is now a good time to buy?
Dudson, who invests in property and has written a book, Good with Money, which was released this year, said that due to less competition for properties, entering the property market now is a lot easier than 12 to 18 months ago.
But as interest rates are higher, affecting serviceability and borrowing power, she acknowledged that getting onto the property ladder is also harder.
“I think that if the deal makes sense and it fits your goals any time is good to buy,” Dudson said.
While no one can predict the bottom of the market, less competition from buyers makes finding a deal easier, she said.
“[Borrowers] need to take a longer term view, as I don’t believe we are going to see a fast recovery,” Dudson said. However, if net migration is at the high numbers estimated, and building is tapering off, we are likely to see demand exceed supply in another year or two, which will push the market back up.”
Do you expect the proposed changes to LVR restrictions to make it easier for homebuyers? Share your thoughts in the comments section below.
