There have been some recent changes that are important to know about when considering a property purchase..

Changes to the LVR

A loan-to-value ratio (“LVR”) is a measure of how much a bank can lend against a residential property, compared to the value of that property. For example, a borrower with an LVR that is higher than 80% has purchased a property with less than a 20% deposit.

As many people will know, the current LVR limit is set at 80%, meaning that a bank can only lend 80% of a property’s value, and that a purchaser must have at least a 20% deposit.

A bank is allowed to have a small portfolio of lending over the 80% LVR limit.  Currently each bank can have 10% of its total lending above the 80% LVR limit.  This is changing effective from 1 October 2015. 

In Auckland

- The LVR limit will change to 70% for property investors, meaning that a borrower will need to have at least a 30% deposit.  A residential property investor will be defined as being someone who takes out "any retail mortgage secured on a residential property that is not owner-occupied".

- Each bank will still be allowed to have 10% of its total lending above this threshold.

Outside Auckland

- The LVR limit will stay at 80% meaning that a borrower will still need to have at least a 20% deposit.

- However each bank will be allowed to have 15% of its total lending above this 80% threshold.

The Reserve Bank expects banks to respect the spirit and intent of the LVR restrictions and to closely monitor the level of high LVR lending.  In saying this however the Reserve Bank will also have in place reporting requirements on the LVR breakdown of banks’ residential mortgage lending.

“Capital Gains” Tax

From 1 October 2015, a revised “capital gains” tax will apply to residential property that is purchased and sold within a two-year period.  The tax will be at the seller’s normal income tax rate.

Currently, sellers are only taxed if the IRD believes it was their intention to sell a property within ten years of purchase, for the purpose of making a capital gain.  This rule will remain, in addition to the new two-year test.

So, if an individual sells a property after two years and one day, they could still possibly be taxed if they were held to have purchased with the intention of selling within the ten year period to make a gain. The change ultimately sets out a clear framework and gives the IRD more power to police the present policy.

In order to make it easier for the IRD to work out who is trading property for capital gain, all buyers and sellers of property (that is not their main home) will need to supply a New Zealand IRD number as part of the sale and purchase process.  All non-residents will also be required to have a New Zealand bank account before they can obtain a New Zealand IRD number. 

Exemptions will apply in most cases for individuals whose property sold was:

• their main home; or
• part of a deceased’s estate; or
• inherited; or
• transferred as part of a relationship settlement.

These new changes are designed to help alleviate what has been termed New Zealand’s “housing crisis”, by targeting investors and discouraging the quick purchase and sale of properties for profit.