The recent changes to both the loan valuation ratios and debt servicing calculations are catching many bank borrowers by surprise when they find out their loans are being declined or the bank can lend them far less than they are normally used to borrowing. The banks were very quick to implement the changes at the request of the Reserve Bank and this has immediately put the brakes on many investors, builder/developers and home buyers. Many people who have engaged my services over the past month have found that their banks have become somewhat rigid in applying the new rules. This has taken many by surprise and left them feeling angry towards the changes.
Current investment property owners need to also be aware that if they sell or refinance, and they owe more than 60 per cent on an investment property, they will get caught in the new rules. What this means is that if you sell a property and try to keep some of the equity or cash, then unless you have at least 40 per cent equity in the remaining properties, the bank will keep the additional funds and reduce your other loans with the bank. I have had two instances of this happening to customers this past week. One thought that when they sold they could keep about $200,000 to purchase another property, but because they had other investment loans, the bank wanted the $200,000 to be paid off other loans to bring the loan-to-value ratio down to 60 per cent on the remaining properties.
As you can imagine, they were very unhappy about this and came to me for advice. After reviewing the situation, we came up with a solution to enable them to keep most of the cash so they could carry on with the next project.