Investment property interest write-off change prompts lending rethink by ANZ

The country’s largest bank will review its affordability equations for lending to property investors after the Government’s decision to phase out mortgage interest tax deductions for investors.

Antonia Watson, ANZ New Zealand chief executive, said the bank already had various buffers built into its lending assessments.

“But given many investors will be required to pay more tax in the future we may need to tweak them further to account for this.”

This could make it tougher for investors to get a loan or reduce the amount of money they can borrow.

Watson said it was looking into what the change would mean for its current mortgage lending book in which around 70 per cent of lending was going to owner-occupiers and 30 per cent to investors.

“Late last year ANZ led the market by introducing 40 per cent deposits for investors and that’s seen the number of investors applications declining and the gap has been filled largely by owner-occupiers.

“Our growth in home lending volumes are still very strong which means the country still has a demand and supply issue.”

Watson said the Government’s housing announcements would not in themselves solve the housing crisis.

“No government has managed to solve the housing problem because it’s fundamentally a long-term supply and demand issue.

“The only place in New Zealand where house prices are anywhere near normal is Christchurch and that’s because of the massive house-building programme after the earthquakes.”

But Watson said the announcements would change the playing field because they will impact investors looking to buy houses and often first home buyers and investors were competing for the same housing stock.

She said increasing the bright-line test from five to 10 years meant people’s investment horizons will change.

“Mum and dad investors in their 50s with spare cash might choose not to lock their money up for 10 years.”

Watson said phasing in the tax deductibility on mortgage interest would impact some investors but most invested for the tax-free capital gain over the long term.

“It could impact the affordability equation for some investors. Some investors might be forced to put up rents to cover this affordability or sell their houses. We think investors will stop and take stock.”

Bruce Patten, a mortgage broker at Loan Market, said at the moment all the banks only took 75 per cent of rental income into account to allow for rates, maintenance and other costs.

“I probably see if anything they will adjust that figure and they might only take 60 per cent to allow for tax on the rent now.”

Patten said the interest tax deductibility change was so out of the blue it took people by surprise.

“They way I see it, if I was looking at this logically and I was an investor, and I am, I would bail out of my existing properties and sell them and then buy new builds.”

Yesterday’s announcement means owners of existing investment properties face a phased-in removal of interest deductibility over four years.

Those who buy property after March 27 face the full removal of interest deductibility fromOctober 1 unless it is a new build, although exactly what qualifies as a new build will go through a consultation process.

The bright-line test has also been extended for 10 years for existing properties but stays at five years for new builds. The bright-line test means those who sell within the specified timeframe have to pay tax on their capital gain.

Patten said that could leave older more run-down houses for first home buyers because it was likely investors would sell the ones that needed insulating and upgrading first.

“They [first-home buyers] are going to end up with all the old homes, that are uninsulated, without heating and they are going to be lumbered with the need to do all that work to bring them up to healthy standards just for themselves. So we are going to have a real shift in the market.

“It is going to be quite an upheaval,” he predicted.

Patten said he had been inundated with queries from his clients about the housing announcements and had had 46 more emails come in overnight.

He said people were struggling to get their heads around all the changes.

Patten said the biggest problem he had at the moment was people buying houses off the plan with a long sunset clause which allowed them to get out of the deal if the property was not built within a certain amount of time.

“The banks won’t accept those sunset clauses. They are going to have to change their criteria to start accepting it otherwise people can’t get finance approved to buy these new properties.”

He said the maximum timeframe some were doing was 12 months. But he said most sunset clauses were running out to two years.

Patten said there had already been a shift towards people wanting to buy new builds because of the loan-to-value ratios coming back in on March 1. New builds are exempt from those lending restrictions as well.

“They are just going to be through the roof now. The problem is the banks need to catch up.”

“I do see the lending criteria getting tighter. It has been getting harder and harder for people.”

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