Exciting Changes to Bank Lending Criteria in 2024: Insights from Global Finance

Coming up are anticipated shifts in bank lending criteria in New Zealand that could significantly impact investors: namely changes to the bright-line test and the introduction of a debt-to-income ratio. As an investor or homebuyer, what could these changes mean for you? We asked Aseem Agarwal, Head of Mortgages at Global Finance.

Bright-line test changes

“The bright-line test on investment properties is poised to revert to a two-year period for both existing and new-build properties.”

Dubbed by some as an anti-flipper test, the bright-line test is a de facto capital gains tax. Essentially, under the current tax laws, if you buy property in New Zealand – which you don’t use as your main home – and intend to resell it within ten years, tax is payable on any profit you make from its sale. Similarly, if you build a property and sell it within five years, you also pay tax on any profit you make from its sale.

Under the proposed adjustment to the bright-line test, properties held for two years or more, or purchased today and sold after two years, will be exempt from paying tax.

This change is anticipated to be announced by late June, with effectiveness from the 1st of July 2024. It offers a relief for investors, potentially enabling them to offload properties that have been yielding minimal returns.

Introduction of debt-to-income ratio

Another significant change on the horizon is the introduction of a debt-to-income ratio by the Reserve Bank. This is slated for implementation from the 1st of July.

“The Reserve Bank aims to introduce a debt-to-income ratio, limiting lending for residential investment properties to no more than seven times the borrower’s gross income.”, Aseem explains.

This adjustment is a proactive measure to ensure responsible lending practices. Currently, there is no debt-to-income lending criteria in New Zealand. However, in practice, Aseem tells us, lenders typically do already cap borrowing at around six to six and a half times the borrower’s incomes.

“Given the stringent assessment rate set by banks, which currently sits at 9%, borrowers typically do not exceed six to six and a half times their gross income,” he explains.

The proposed introduction of a debt-to-income ratio aims to mitigate excessive borrowing. Aseem notes that while its immediate impact may be limited due to existing lending practices, he predicts the introduction of this ratio could prompt banks to reassess and potentially a loosen their future lending criteria. Therefore, long-term implications do warrant attention.

Aseem suggests these changes may impact market dynamics in some unexpected ways. While the bright-line adjustments aim to stimulate market activity, he predicts there could initially be an influx of property for sale as investors reevaluate their portfolios.

“I think what will be interesting is that when the bright-line changes get announced, there may be a perception that a lot of borrowers will come back, but actually we believe the reverse is going to happen”.

Then, as interest rates adjust and market conditions stabilise, he anticipates a gradual resurgence in borrower activity.

How these changes impact investors

It’s natural to have questions about how these changes will affect you as an investor. The adjustments to the bright-line test may offer opportunities to optimise your investment portfolio, potentially freeing up capital and streamlining your financial strategy.

With regards to the debt-to-income ratio, the bottom line is that you should always assess your borrowing capacity to ensure it aligns with your financial goals, irrespective of how much a bank would be willing to lend you.

Looking ahead with Global Finance

At Global Finance, we understand the importance of staying informed and proactive in today’s ever-changing financial marketplace. Our team is focused and is always here to provide guidance and support.

Whether you’re a seasoned investor or exploring new opportunities, our team is here to offer expert advice. So, reach out to us today to learn more about how these changes in bank lending criteria could impact you on your path to financial success.

The information and articles published are true to the best of the Global Finance Services Ltd knowledge. Since the information provided in this blog is of general nature and is not intended to be personalized financial advice. We encourage you to seek Financial advice which is personalized depending on your needs, goals, and circumstances before making any financial decision. No person or persons who rely directly or indirectly upon information contained in this article may hold Global Financial Services Ltd or its employees liable.