The RBNZ have indicating which tools they will be deploying over the next few months. Namely three distinct areas which will affect banks,
- Low deposit borrowers to see some changes
- debt-to-income ratios
- interest rate floors
Low deposit lending
To put it in simple terms at the moment, 2 out of 10 loans can be for low deposit borrowers(less than a 20% deposit). As of October, this number is gonna drop to 1 out of 10. 10% of the loans will be able to be less than 20% deposit.
Now, exemptions to this, new build and “first home loans” under the Kainga Ora scheme(restricted purchase prices and income criteria apply) will carry on.
Now, interestingly, the actual retail banks are already running under 1 out of 10 overall. Back in 2013 when these macro prudential rules were new, we actually started with the 1 out of 10 rule. And the banks kept it well under that back then as well.
So look, what you may see are things like:
30-day pre-approvals maybe instead of two-month ones
banks from time to time will only look at live deals, so auctions will be harder to attend
banks may help their existing clients first(which are usually people that have that have been depositing their income into their bank for a few months usually)
Debt-to-income ratios
A few countries that run these debt-to-income ratios, say five to six times your gross income should be the max amount of loans.
So if you’re earning $100,000, you might find that the bank says you can’t borrow more than $600,000.
In New Zealand, I see a lot of application running at seven times the income. So six times is not going to be the end of the world but it will have an impact. This will take quite a few months to put in place because each bank has their own system and their way of working things out. Plus details will have to worked through such as in how different parts of income will be considered.
Interest rate floors
Most banks basically, aren’t using 2 or 3% to calculate how much you can afford. When they look at your situation, they’re actually going thinking could this person afford it at 6 to 7% interest rate.
So the Reserve Bank is saying that this might be formalized somewhat, and the Reserve Bank may have more control over this.
The idea is not to actually drop house prices because that’s not in the mandate for the Reserve Bank. What it’s designed to do is prevent any shocks to the system. So basically what they would like is that if there is a sudden price decrease, that people are likely to hang on. And that ideally there isn’t a big up then down.
So some of this stuff is actually a good thing, it kind off builds in an insurance policy for future shocks. Let’s face it, in a way, through COVID, maybe some of these tools meant there was less money printing.
