You may have noticed in the media a lot of noise lately around the LVR restrictions being removed completely by the Reserve Bank of New Zealand until 1st May 2021, due to the economic fallout from COVID-19. There's a good reason for the media buzz too - this change marks the end of nearly 7 years worth of LVR restrictions, and has the potential to make home-buyers lives a lot easier when it comes to taking out a bank home loan.
However, there's a lot more to the whole picture than a free-for-all of lending for the next 12 months. Just because banks can lend without restriction doesn't mean they will, and taking out a loan with a low deposit still goes hand-in-hand with a significant amount of risk if not properly planned.
We've put together this blog to hopefully clear up any frequently asks questions around the removal of LVR restrictions, and explain what it really means for Kiwi home buyers. If you've got any questions, feel free to get in touch directly or drop a comment below.
- What is LVR?
- What were the LVR restrictions?
- What are the benefits of the LVR Restriction Removal for NZ home buyers?
- What is the new criteria for lending?
What is LVR?
The short answer: it's your loan to value ratio, or the percentage of the home you actually own (through your deposit) against the amount you're borrowing to total value of the property.
When you’re looking to get approval or pre-approval for a new property, lenders will want to understand what your Loan to Value Ratio (LVR) is. Lenders use this evaluation as a measure of your risk as a borrower as a part of their preliminary checks.
In most instances, having a low LVR will open up the options available to you and potentially better the home loan rate your mortgage provider can offer you. Typically, 80% is considered the benchmark for measuring LVR, meaning that high LVR would be someone borrowing greater than 80% of the value of the property. 80% for owner occupied/home and 70% for investment/rental property (although watch this space as we may see more lenders look to increase to 80%)
A low LVR might look like:
- Deposit: $100,000
- Property value: $500,000
- Home loan of: $400,000
- LVR: 80%
Whereas, a high LVR might look like:
- Deposit: $50,000
- Property value: $500,000
- Home loan of: $450,000
- LVR: 90%
What were the LVR restrictions?
LVR restrictions were first imposed in 2013 to reduce the amount of low-deposit and risky mortgage lending in New Zealand. At the time, property prices were quickly rising and the Reserve Bank needed a way to regulate high-risk purchasing.
Specifically, the LVR restrictions were as follows:
- Investor loans were tightened to require a 30% deposit (or low LVR)
- High-LVR loans that were more than 80% of the property’s value (20% deposit) were required for owner-occupied houses, for example a property that a borrower lives in or uses as a holiday house.
What are the benefits of the LVR Restriction Removal for NZ home buyers?
The debate as to whether the LVR restriction removal will prove to be a positive or negative thing for Kiwis looking to buy property continues, as every week the nature of the market changes. However, there are a few outcomes we're noticing that are proving to be positive:
- If a customer takes the 'mortgage holiday' option offered by the government, rather than penalising the customer for braking their loan agreement due to COVID-19, it gives them a little breathing room and loosens up what would otherwise be quite a tight cashflow situation.
- We've seen some lenders, such as Kiwibank, go to an 80% LVR for investment properties, which is somewhat unprecedented in NZ and might open up opportunities for Kiwis looking to buy.
- As as individual finances permit, it does offer the ability to get onto the property ladder slightly sooner than anticipated (although we wouldn't suggest locking in a risky, low deposit loan if you can avoid it)
- For existing home owners, the possibility of extending hardship assistance isn't limited by tough LVR restrictions. If your mortgage is suddenly over the 80% threshold due to financial hardship, you wont be as financially punishing for you or the banks as it once would have been.
Clearly, there are a few benefits - however we don't have a crystal ball that predicts how the market and economy will shift in the next 12-months, so it's still as important as ever to engage with a mortgage adviser and do your due diligence before taking out a home loan.
What is the new criteria for lending?
While the banks can loosen up on their lending criteria, doesn't necessarily mean they will. In fact, in many instances banks already had exemptions and options in place for borrowers who didn't meet the LVR restrictions, so not as much as it seems has changed.
What we have seen in our experience thus far, is the tightening of rules brought out by the banks in their pre-approval checks, as banks are aware that a low deposit home loan is still considered 'high risk'. For example, to take out a home loan, you still need;
- A clean credit report
- a good history of debt repayment (or no history/debt)
- a good track record of personal spending proven by your bank transactions
- stable income (which currently can be volatile and subject to change as we potentially enter a recession)
- a high affordability rate, meaning even if your loan agreement would be to pay 2% in interest per month, the banks want to know you're able to pay up to 7.20% if it came down to it
In short, the banks still have tonne of hoops they expect buyers to jump through.
While anyone can walk into a bank and apply for a loan, their success level may vary. The good news is, a good adviser is always going to get good results, through leveraging their knowledge of banks and offers, and negotiating good and fair terms for a home loan.
If you'd like to find out how you can make the most of an unprecedented situation and the removal of LVR restrictions - while being responsible and mitigating long-term risk, get in touch with one of our advisers, below.