Reserve Bank of New Zealand LVR New Commitments Reporting Guide

PROCEDURES & DEFINITIONS
Loan to Valuation Ratio - New commitments survey September 2022 Please contact the Reserve Bank Statistics Unit (statsunit@rbnz.govt.nz) to discuss these procedures and definitions if in any doubt about their meaning or if following them will produce an internal inconsistency with your available financial data. Definitions:
Commitment
A bank enters into a new commitment for a residential mortgage loan on the day that the bank sends the loan documentation to the applicant’s solicitor. This is typically the day on which the bank has made an irrevocable offer to an applicant for a residential mortgage loan and the borrower has accepted the offer. By this point in the process the credit risk should be regarded as being the same as if the asset was already on the balance sheet. New commitments do not include pre-approvals that may or may not lead to a firm offer of finance. Necessary (but not sufficient) conditions for a new commitment are that a specific property has been identified and that an amount has been agreed for the loan that the customer will draw down, or in the case of a mortgage lending facility, for the facility limit.

Residential mortgage loans
Residential mortgage loan is formally defined in BS19 (referring to BPR001). Loan to valuation ratio (LVR) Loan-to-valuation ratio = [loan value / property value] x 100 Loan value and property value are formally defined in BS19. Unknown LVR In extraordinary cases, it may not be possible to determine the loan-to-valuation ratio, and therefore to allocate a commitment to an LVR band. Such commitments should be reported in the “LVR unknown” bands. For policy purposes, including the application of LVR restrictions, these commitments will be treated as “LVR > 100%”. Origination The origination date is the time that a loan is committed to by the bank and includes any point in time at which there is a credit event in respect of a borrower. Investor Investors are entities or persons borrowing for the purpose of building or purchasing residential property to rent. Note that the definition differs slightly between compliance (Part
2) and commitment use (Part 4) reporting.

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Investor (Part 2-compliance)
For the purpose of compliance reporting borrowers are split by the nature of the collateral (BS19). Investor (Part 4-commitment use) For reporting commitment use, loans should be based on the buyer’s declared purpose of the loan if the loan is to purchase, refinance or improve a property. Where the purpose of the loan is not business or the purchase or improvement of a property (e.g. a loan for a holiday) the loan should be classified based on the nature of the dominant underlying collateral. Based on commitment use (declared purpose) some loans will be for owner occupier or business purposes, but classified as an investor loan in the compliance reporting. For example:
A purchase of a property in Hamilton to live in is reported as owner occupier in the commitment use tables. If the loan is partly secured over an Auckland rental, the entire new commitment is recorded as an Auckland Property Investment Loan in the compliance reporting tables. Owner occupier Owner occupiers are borrowers who own or are in the process of buying or building the house or flat they will live in. An owner can occupy more than one property e.g. a family home and a holiday home. Note the difference above for reporting commitment use and for compliance.

First home buyer
A first home buyer is a borrower entering the home ownership market in New Zealand for the first time. In the case of more than one borrowing parties to a loan, borrowers are classified as first home buyers only if none of the borrowing parties have previously drawn down on housing finance for owner occupation. If the borrower, or at least one borrowing party, has previously drawn down on housing finance for owner occupation they should be classified as “other Owner Occupier”. The borrower declares whether they are a first home buyer as part of the loan application. Commitments for business purposes These commitments are made to borrowers in the form of a residential mortgage loan but are intended for business purposes. The borrower declares that the loan is for business purposes as part of the loan application.

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Commitments that are exempt from RBNZ LVR restrictions When LVR restrictions are in force, the number and values of new commitments that a bank treats as “exempt” (see BS19 criteria) must be reported in this section1 . There are eight types of exemptions, which should be reported as follows:

• Housing New Zealand’s Mortgage Insurance Scheme
  These include loans made under Housing New Zealand’s Welcome Home Loan scheme or Kainga Whenua programme. Should Housing New Zealand introduce other types of lending under its Mortgage Insurance Scheme, these would also be covered. Refer BS19 (12)(a) for details.
• Refinancing
  These include loans that are taken out or will be taken out to refinance an existing residential mortgage loan. Refer BS19 (12)(b) for details.
• LVR portability
  These include owner-occupier housing loans that are taken out to finance the purchase of a new property, within three months of sale of the borrower’s previous property. Refer BS19 (12)(c) for details.
• Bridging finance
  These include loans that are taken out to complete the purchase of a residential property (the “new property”) on a date before the date on which the borrower completes the sale of another residential property (the “old property”). Refer to BS19 (12)(d) for details.
• Construction loan
  These include loans to finance the construction or purchase of a new residential dwelling. Refer BS19 (12)(e) for details.
• Combined collateral
  These include loans for investments that are secured against multiple residential properties, including an Auckland investment property. Refer BS19 (12)(f) for details.
• Property remediation
  These include loans to finance residential property repair or remediation work, such as rectifying leaky buildings or seismic strengthening. The repair or remediation is not routine or deferred maintenance. Refer BS19 (12)(h) for details.
• Loan granted in error
  These include loans where the bank committed to the loan without full understanding of the impact on the banks total high-LVR proportion. Should this exemption be applied the Reserve Bank of New Zealand needs to be informed in writing on how the error occurred. Refer BS19 (12)(g) for details. Interest only loans Loans that have no scheduled principal repayment, but may at a later date change to principal and interest. This includes loans where borrowers independently choose to repay principal e.g. revolving credit loans that have a fixed limit etc. This does not include revolving credit loans that have a scheduled reducing limit.

1 Refer BS19 - Framework for restrictions on high-LVR residential mortgage lending, available at http://www.rbnz.govt.nz/regulation_and_supervision/banks/consultations/BS19-Framework-for LVR-restrictions- October 2021.pdf.

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Top-ups
Top-ups are increases in lending (regardless of purpose) to an existing residential mortgage loan where the underlying security has not changed but may be revalued and/or additional security may be provided. Purchase of a property Residential mortgage loans taken out to purchase or build a property. This includes for example, first home buyers, other owner occupiers who purchase a second property and investors. Change in loan provider Residential mortgage loans taken out to refinance an existing residential mortgage from another bank or non-bank lender, regardless of whether the value of the loan has changed during the transfer. Note that this is very similar to the concept of refinancing, but given that there already exists a refinancing exemption (which has further restrictions) we have chosen a different terminology. Other commitments Residential mortgage commitments that do not meet the definitions for top-ups, property purchases, or a change in loan provider as described above. Some examples of commitments that may fall into the other category include:

• The use of an unencumbered property as security for a new loan, regardless of the loan
  purpose.
• Instances where mortgage interest is capitalised (e.g. mortgage holidays).
  Memo item: Bridging finance
  All new commitments involving bridging finance, including both open and closed bridging finance, should be reported under the “other” purpose category. This includes all multipurpose loans with a bridging component, even if bridging finance is not the predominant purpose of that loan. Drawdowns A drawdown occurs at the time money is transferred to the borrowers account. This represents the gross increase in credit associated with newly originated loans (to new and existing customers) as well as increases to residential mortgage loans, including revolving credit limits (or similar facilities). How to record construction loans The borrower’s LVR should be calculated as the total value of the loan being committed divided by the estimated valuation of the property on completion. Current valuation practice should be used to estimate property valuation on completion. When reporting new commitments, record the total value of the construction loan as committed at the time of origination.

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When reporting drawdowns, record the value of the construction loan that is drawn during the reference month. Auckland boundary “Auckland” means the area within the boundaries of Auckland as prescribed by the Local Government (Auckland Boundaries) Determination 2010 (as amended or replaced from time to time).

Instructions:

• Only newly committed residential mortgage loans are to be reported in this survey.
• Report the number of commitments as one per loan application regardless of the number
  of mortgage loan products the borrower chooses to use e.g. a fixed portion and floating portion should be counted as one commitment.
• Report the value of commitments as the gross increase in credit associated with new
  commitments this month. Include increases to residential mortgage loans, including revolving credit limits (or similar facilities).
• Where requested, report total borrower’s (or borrowing parties’) income that relate to new
  commitments this month.
• Where requested, report the median debt to income ratio for each LVR band.
• Report dollar figures in millions to three decimal points, i.e. to the nearest hundred
  thousand New Zealand dollars. For example $1,234,567.89 is reported as 1.234
• Report values in white cells only. The grey cells will derive from data entered in white
  cells.
• Report new commitments according to the borrower’s (or borrowing parties’) new loan
  to valuation ratio, which takes into account the new commitment.
• Resolve all validation errors prior to submitting the survey.
  These instructions refer to the LVR new commitments survey effective from 1 November

2015. Please report by completing Part 2 – Compliance reporting and Part 4 – Commitment
      use. Please review the high-level results (Part 1) and sign-off before submitting to the Reserve Bank. Instructions for completing Part 2 – Compliance reporting
      2.1 Auckland property-investment residential mortgage loan new commitments
      Report all new commitments that are secured over at least one Auckland investment property. These commitments are defined as “APIL” in BS19.
      2.2 Auckland property-investment residential mortgage loan new commitments that
      are exempt from RBNZ LVR restrictions
      Report the number and value of loans that are exempt from RBNZ LVR restrictions, by type of exemption. These commitments should also be reported in the appropriate cells in question 2.1. How to record combined collateral exemption This exemption applies to a loan that is secured against multiple residential properties (including an Auckland investment property). The exemption will apply if the total borrowing

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6 secured by the properties is less than or equal to 70% of the value of the Auckland investment property and 80% of the other properties. For example, assume a customer has an investment property in Auckland valued at $1,000,000 and a loan valued at $700,000. Assume that that customer takes out an additional loan of $800,000 and purchases a property outside Auckland valued at $1,000,000 and that the total value of the loans is secured over both properties. The loan is considered to be an Auckland property investment residential mortgage loan. However, the total value of loans divided by the total value of the properties is 1,500,000/2,000,000 = .75. The weighted average LVR is (.70*.5 + .80 *.5) = .75 The loan can be treated as exempt and should be recorded in the combined collateral exemption category. Report the new commitment under question 2.2 (g). Also record the new commitment in question 2.1.

2.3 Auckland owner occupied residential mortgage loan new commitments
Report the number and value of loans that are secured over at least one Auckland property, but not secured over an investment property. These commitments are defined as “ANPIL” in BS19.
2.4 Auckland owner occupied residential mortgage loan new commitments that are
exempt from RBNZ LVR restrictions
Report the number and value of loans that are exempt from RBNZ LVR restrictions by type of exemption. These commitments should also be reported in the appropriate cells in question 2.3.
2.5 Non Auckland property investment residential mortgage loan new commitments
Report the number and value of loans that are secured by at least one investment property, but no Auckland rental property. These commitments and those reported in part 2.7 are together defined as “non-Auckland loans” in BS19.
2.6 Non Auckland property investment residential mortgage loan new commitments
that are exempt from RBNZ LVR restrictions
Report the number and value of loans that are exempt from RBNZ LVR restrictions by type of exemption. These commitments should also be reported in the appropriate cells in question 2.5.

2.7 Non Auckland owner occupied residential mortgage loan new commitments
Report the number and value of loans that are not secured by any Auckland collateral and are not secured by any investment property. These commitments and those reported in part
2.5 are together defined as “non-Auckland loans” in BS19.

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2.8 Non Auckland owner occupied residential mortgage loan new commitments that
are exempt from RBNZ LVR restrictions
Report the number and value of loans that are exempt from RBNZ LVR restrictions by type of exemption. These commitments should also be reported in the appropriate cells in question 2.7.
2.9 Total commitments
Derived by adding 2.1, 2.3, 2.5 and 2.7.
2.10 Total commitments that are exempt from RBNZ LVR restrictions
Derived by adding 2.2, 2.4, 2.6 and 2.8.

Instructions for completing Part 4 – Commitment use reporting
4.1 Commitments made to first home buyers:
Include only commitments to first home buyers to purchase or build a residential property.

For first home buyers, do not include increases to residential mortgage loans, including revolving credit limits (or similar facilities) because the borrower has previously drawn down on housing finance for owner occupation. Future loan top ups for first home buyers should be recorded as new commitments to other owner occupiers.
4.2 Commitments made to other owner occupiers property use:
Include only commitments to owner occupiers. Do not include first home buyers.
4.3 Commitments for owner occupier property use:
The number and value of commitments and total income is derived by adding 4.1 and 4.2.

4.4 Commitments for investors property use:
Include only commitments for the purpose of financing (e.g. purchasing, renovating or switching an existing mortgage over) an investment property.
4.5 Commitments for business purposes:
Include residential mortgage loan commitments for business purposes.

4.6 Total residential mortgage loan commitments:
Derived by adding 4.3, 4.4 and 4.5.
4.7 Value of interest only commitments:
Report interest only commitments for all purposes, broken down by owner occupiers, investors and business purposes according to the borrower’s (or borrowing parties’) new loan to valuation ratio.

• Include new commitments with revolving credit products that have a fixed limit.
• Do not include commitments with revolving credit products that have a scheduled
  reducing limit.

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If the borrower chooses to split the new commitment across multiple loan products, report the interest only and/or revolving credit with fixed limit portion(s) only.
4.8 Commitments for top-ups, purchase of a property, change in loan provider and
other commitments
Report the total value and number of new commitments broken down by top-ups, property purchases, a change in loan provider and other commitments. The total value of new commitments reported in section 4.8 should match the total value of residential mortgage loans reported in section 4.6. For multiple purpose lending arrangements, banks can choose one of two reporting criteria. Option one: split multipurpose loans across each purpose category depending on the individual value of each component of the loan. For example, a $600,000 multipurpose loan consisting of a $100,000 top up and a $500,000 property purchase would be reported separately at the purpose level only as two loans: one $100,000 top up and one $500,000 property purchase. However, at the aggregate level, the loan would still be reported as a single new commitment valued at $600,000. Option two: categorize multipurpose loans according to the following purpose hierarchy:

1. Property purchase,
2. Change in loan provider,
3. Top up,
4. Other.
   This means that if a loan involves multiple purposes, it should be reported under the purpose that appears highest in the hierarchy. For the previous example involving a top up and property purchase, it would be reported as a $600,000 property purchase since property purchase is higher than top up in the purpose hierarchy. The above guidance does not apply to multipurpose loans with a bridging finance component. All bridging loans should be reported under “other”.
   4.9 Total value of residential mortgage loan drawdowns:
   Report all newly originated loan amounts drawn down during the month and any increases to residential mortgage loans, including revolving credit limits (or similar facilities). Report the value of drawdowns as the sum of money transferred to borrowers’ accounts for residential mortgage loans in the month. Drawdowns reported for the month are irrespective of when the loan was committed. Examples:
   How to report:

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1. The purchase of a home for $500,000 by a first home buyer with a $50,000 deposit.
   Calculate the borrower’s LVR
   = 450,000/500,000
   = 90% the borrower’s LVR is ≥ 90 < 95
   Report the $450,000 commitment under 2.7 (c) since the property is not secured by any Auckland collateral and is not secured by an investment property. Report the $450,000 commitment under 4.1 (c) and under 4.8 (c) in the column for the purchase of a property.
2. A commitment to a start-up business of $50,000 secured on the borrower’s house valued
   at $500,000, which currently has no mortgage.
   Calculate the borrower’s LVR
   = 50,000/500,000
   = 10% the borrower’s LVR is <60
   Report the $50,000 commitment under question 2.3 (j) because the loan is secured by Auckland collateral that is not an investment property. Report the $50,000 commitment under question 4.5 (j) because the loan is for business purposes. Also report the $50,000 commitment under question 4.8 (j) in the column for other commitments since the property was unencumbered when the loan was originated.
3. The purchase of a holiday home outside Auckland for $300,000 by an existing customer
   that is secured by the borrower’s home in Auckland and an Auckland investment property. The borrower’s home and investment property currently secure a $700,000 mortgage. Revalue the mortgaged properties. Assume that the borrower’s house and Auckland investment properties are now both valued at $800,000. Also, assume that the new holiday home is included as security and valued at $300,000. Calculate the borrower’s LVR = 1,000,000/1,900,000 = 52.6% the borrower’s LVR is < 60 Report the $300,000 commitment under 2.1 (j) because the holiday home is partially secured by an Auckland investment property. Report the $300,000 commitment under 4.2 (j) because the holiday home is for owner occupation and the borrower has previously drawn down on housing finance for owner

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10 occupation (so not a first home buyer). Also report the $300,000 commitment under 4.8 (j) in the column for the purchase of a property.

4. A $470,000 commitment to a couple to purchase a $500,000 block of three flats outside
   Auckland that they intend to rent out. The rental property is the only security. Calculate the borrower’s LVR = 470,000/500,000 = 94% the borrower’s LVR is ≥ 90 < 95 Report the $470,000 commitment under question 2.5 (c) since the loan is secured by an investment property outside Auckland. Report the $470,000 commitment under question 4.4 (c) because the couple do not intend to live in the properties and are therefore investors. Also report the $470,000 commitment under 4.8 (c) in the column for the purchase of a property.
   Appendix 1: Document change log
   Version Date Comment
   V1.1 Nov 2015 Last issued reporting guide document V1.2 Sept 2018 Update to ‘Investor’ definition (pg.2) Clarification on ‘interest only’ definition (pg.4) Removal of DTI and income related definitions Removal of reverse equity wording V1.3 Oct 2021 BS2A and BS2B replaced by new 'Banking Prudential Requirements' (BPR). Updated BS19 document issued October 2021 V1.4 Sep 2022 Clarification on reporting multipurpose loans and bridging loans.