Opinion: In May 2020, the Reserve Bank removed the loan to value ratio restrictions on banks with a commitment that it wouldn’t make any alterations for a year. Earlie this month, the Reserve announced that due to the property industry being much stronger than anticipated, it would review reimplementing the LVR restrictions in March 2021. Only a couple of months earlier but a notable change.
A lot has been spoken about using LVRs to cool the market and while property investors aren’t completely to blame, telling them they have four months to purchase at 80 percent rather than 70 percent was always going to hurt the market more than help. The banks made the Reserve's announcement more effective by almost immediately changing their internal policy to requiring 30 percent deposit.
One thing that appears to have been missed, though, is the implications on current home owners. The LVR restrictions weren’t lifted solely to prop up the property market. With financial hardship claims predicted to spike hugely as a result of Covid-19 unemployment, the lifting of the LVR restrictions was done to make sure banks didn’t accidentally breach the Reserve Bank’s rules by allowing mortgage deferrals (commonly referred to as mortgage holidays).
And a lot of people continue to be unemployed more than eight months later. The first round of hardship relief packages typically lasted for six months and for people who were still struggling, could be extended for up to another six months.
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But with the banks likely having to meet LVR restrictions from March, getting a further extension will be significantly harder. Current home owners who are still unemployed will have to consider what will happen in March if they continue to be unable to pay their mortgage. While the banks will be sympathetic, the response to non-payment may look very similar to prior to Covid. In other words, owners will be given some time to sell the house under their own power with increasing involvement from the bank after one to two months.
Home owners in this situation need to be thinking about a solution today. Retraining in a new industry could be completed by March, renovations to make a house more likely to sell can be done over summer and ready to list in January. The solution will be different depending on each personal situation. But solutions of this magnitude happen slowly and leaving the solution until your hardship relief is due to renew may mean taking the power out of your hands.
- Rupert Gough is the founder and CEO of Mortgage Lab and author of The Successful First Home Buyer.
