The Impact of the New Investment Property Rules on your Holiday Home

Recent Reserve Bank developments affect owners of bach and holiday homes.

The Reserve Bank is aiming to crack down on the property investment sector. Bach and holiday home owners are likely to fall within the new investment property definition.

The definition of an investment property has been a grey area for many years. The central bank has been in consultation to define the term since September 2013.

In May this year a decision was announced. The new class of investment property is any property which is not owner-occupied.

The central bank also intends to proceed with plans to force banks to insist on more capital against investor loans. The bank insists this will then push up interest rates.

The new capital rulings will be in addition to the Auckland-specific restrictions which were also announced in May. The latter will force investors to have a deposit of at least 30 per cent.

The majority of Reserve Bank submissions supported the new broader investor loan definition.

It was felt by the banks that the proposed simplicity would make the rulings easier to implement. However they believed the costs of systems change and staff training could be in excess of $5 million.

But what about baches or holiday home owners?

Auckland lawyer Ian Mellett explains that if you have a bach or holiday home, you would of course be defined as an investor.

The central bank responded to this by saying that some allowance could be made for second properties. With a proviso that only a small rental income is derived. The bank said an example of this would be a bach that might be rented out for a few weeks of the year. No further details were provided.

Documents revealed that banks lobbied hard to try to change the Reserve Bank’s decision. The majority of stakeholders did not support the idea of creating a separate asset class. They disagreed with the rationale that an investment loan is a greater risk than a normal mortgage.

Larger banks voiced the greatest disapproval. They argue that the examples cited by the Reserve Bank are not local, and therefore not relevant. They also suggested that the banking industries in Australia and New Zealand are more conservative than the British and Irish models used.

It’s also suggested that further intervention will reduce the amount of rental properties available. In an already starved rental market this could pose substantial problems.

The central bank believe, however, that the effect of the new classification would be limited on the rental market.
The new classification rules come into force from October 1. This coincides with the 30 per cent deposit required by Auckland property investors.

A period of 12 months has been granted to banks to reclassify their existing loans. The system will be reviewed after 1 year.

Are you concerned about your classification status? Would like more information on the impact of these rulings?

Contact Auckland Lawyer Ian Mellett at Quay Law for more information.