Reserve Bank loan to value ratio (LVR) rules can provide an unwelcome surprise for investors selling one or more properties from their investment portfolios.
That’s because banks must treat any remaining loans on the portfolio properties as being subject to the 65% investor LVR, or 80% for owner-occupied properties, says Auckland-based Mortgage Adviser Allan Luck, who specialises in investment property clients.
The result is that if equity across all rental properties is less than 35%, the investor will be left with a substantially smaller cash surplus than they might have been expecting, says Allan, of Tony Mounce Mortgages & Insurance.
As an example, he cites an investor with one owner-occupied property and four residential investment properties, and all lending with just one bank. The investor purchased the rental properties before the 65% LVR restrictions were imposed and recently sold one rental property, which carried a $400,000 mortgage from the time of purchase. The sale price was $730,000 and he expected to be left with approximately $300,000 from the sale.
“He had made the common mistake of relating a loan to a particular property,” says Allan. “But the problem is that banks do not.”
“The banks have to abide by the current LVR rules and in this example the client did not have 35% equity across all his remaining properties, resulting in him walking away with very little of the proceeds from the sale,” says Allan.
Investors who had purchased rental properties in the last couple of years would be less affected than if they’d purchased under the LVR restrictions, and lacked sufficient equity across their remaining investment properties, he said.
Allan stresses that every investor’s situation is unique and needs to be thoroughly assessed before reaching a solution. “In some cases, I have concluded they are best to spread their rental properties between banks, although in other cases it would be best to consolidate all loans with the one bank. There are a lot of variables.”
He says anyone looking to sell in the short to medium term should clarify their options with an experienced mortgage adviser with access to New Zealand’s six main banks.
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