ARE LVR CHANGES ON THE HORIZON?
April 29, 2020 at 6:30 PM
SHORT BACK STORY
The LVR restrictions have been in place since October 2013 by The Reserve Bank. It was aimed at reducing the risks to financial stability from a severe correction in house prices….think back to the Global Financial Crisis (GFC) of the late 2000s and early 2010s.
CURRENT LVR RESTRICTIONS
The Reserve Bank placed two restrictions on NZ Registered Banks
- Banks can only lend upto 20% of what they have settled for residential mortgages to HIGH LVR OWNER OCCUPIED BORROWERS (who have less than 20% deposit)
- Banks can only lend upto 5% of what they have settled for residential mortgages to HIGH LVR INVESTORS (who have less than 30% deposit)
Note: The calculation of new lending under the LVR policy is completed by the respective banks and is reported to the Reserve Bank on a regular basis. The amount that each bank can lend to HIGH LVR Borrowers will vary based upon how much residential lending is done each month.
WHAT ARE LVRs
Loan-to-Value Ratios (LVR) is a measure of how much a bank lends against a residential property. Here is an example of how this measure is applied based on the deposit you have to contribute:
A couple has saved $80,000 deposit through KiwiSaver and Savings.
If they want to purchase a $400,000 property then they would not be classified as a HIGH LVR OWNER OCCUPIED BORROWER as they have at least 20% deposit. ($80,000/$400,000=0.2 or 20% deposit)
If they wanted to purchase a property for $410,000 then they would be classified as a HIGH LVR OWNER OCCUPIED BORROWER as they have less than 20% deposit. ($80,000/$410,000=0.19 or 19.5% deposit)
HOW DO THESE CURRENT RESTRICTIONS IMPACT ME?
If you have at least 20% deposit as a first home buyer then you become very attractive to banks as 1) you are not classified as a HIGH LVR BORROWER and do not impact their LVR Limits and 2) You provide more security/ less risk based on the size of the loan against the value or the property.
Given there is a limited amount of funds to lend to HIGH LVR OWNER OCCUPIED BORROWERs, most banks will only allocate this to their own customers first which is understandable. If you are a property investor then most banks if not all, were not allowing you to borrow with anything less than 30% deposit for an investment property.
If the proposal to remove the LVR restrictions is approved and implemented, The Reserve Bank will monitor lending activity and feedback from retail banks over the next 12 months as the economic impact of the COVID-19 pandemic becomes clearer. After that period, it will review whether to reinstate LVR restrictions. This provides banks and borrowers certainty that no further changes to LVR requirements will be made for at least one year
First Home Buyers will have more options between banks as each of these banks vary in credit policies and/or affordability criteria which could mean the difference in buying that home!
Kainga Ora have been amazing in the past and I have certainly helped a lot of customers to get into their first homes through this initiative, however it does come with limitations – property caps, income caps, stricter criteria etc…
Investors can also benefit from having LVR restrictions removed. Existing home owners who perhaps did not quite have the 30% equity can possibly turn their home into an investment so that they could upgrade to a larger home. It also allows first time investors into the market and existing investors to increase their portfolios.
Self Employed borrowers could possibly look to borrow more against their homes for cashflow purposes.
I welcome the changes proposed by the Reserve Bank as it will help borrowers through these unprecedented times and hopefully lessen the blow to the housing/ financial market.