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.
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:
Whereas, a high LVR might look like:
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:
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:
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.
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;
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.