The New Zealand LVR (Loan Value Ratio) restrictions have recently been removed. In this blog post, we look at what the changes mean for you, whether you’re a first home buyer, existing homeowner or investment property buyer.
What is LVR?
LVR (Loan Value Ratio) put restrictions on New Zealand banks for the amount of funds they were able to loan to ‘high-LVR’ borrowers purchasing their own home between 2013-2020. A small amount of funds was also available for ‘high-LVR’ investment properties.
‘High-LVR’ is defined as a mortgage of 80% lending or more and has risks to banks. Basically, they can lose money if an owner stops paying their mortgage, or if property prices fall. For example, if you only need a 5% deposit and borrow 95%, a 10% drop in property prices would mean the bank loses money if you can’t pay your mortgage.
The Reserve Bank of New Zealand announced that LVR restrictions on banks in New Zealand would be removed on 30 April 2020. They will be reviewed again in 12 months (April/May 2021). In a nutshell, the amount of money banks can lend to ‘high-LVR borrowers’ is now unrestricted.
Why have restrictions been lifted?
The Reserve Bank strategy is attempting to stop any potential issues if house prices drop and will hopefully boost demand for property post-lockdown.
First Home Buyers
For first home buyers, this is probably good news. You’ll now be able to shop around for the bank that best fits your needs.
Although you’ll still need to meet the bank’s criteria as a ‘credit-worthy’ applicant with enough income, you’re likely to have more options between banks that have enough money to lend to you.
Until now, you could most likely only get pre-approval from your current bank. That’s because under LVR restrictions, most banks were reluctant to give “non-bank clients” pre-approval, in case that meant existing clients couldn’t get approved.
Now, banks should be able to lend money to any client that meets their income and credit requirements.
The Reserve Bank has stated it doesn't want LVR restrictions to inhibit banks from offering hardship assistance for existing homeowners. So, under these new rules, you’re probably not going to be able to apply for top-ups for luxury purchases, but if there is a loss of income or a decline of property value making your mortgage suddenly over 80%, this won't be as bad a situation for you or the bank as it previously was.
Investment Property Buyers
As an investment property portfolio grows, the risk for banks’ lending to ‘High LVR borrowers’ increases. So, if you’re looking to invest, you’ll probably have to wait for banks to assess how our property market is looking post-Covid.
Some are predicting that banks won’t lend more than 70% on an investment property until the market has stabilised. Then we may be able to expect up to 80% lending (with your own home at 80% as well).
Newly Built Homes
Newly built homes were already exempt from the LVR restrictions, as the Reserve Bank was trying to encourage this new construction and kiwis living in high quality homes. So, it will still be relatively easy to finance existing new homes, and you shouldn’t underestimate the massive benefits of buying a new home from the banks’ perspective.
‘High Risk’ Properties a No-go
Recent commentary suggests that just because the banks can lend as much as they like on a property, it doesn’t mean they will. With the broader economic uncertainty around covid, they may continue to take a conservative approach to lending. Ultimately, they’ll be looking to lend to low-risk applicants – that means for high-quality properties to high-quality income earners.
‘High-risk’ properties such as small apartments (less than 40-50sqm), leaky or monoclad homes, leasehold properties, unconsented properties and uninsulated homes that don't meet housing standards are unlikely to be financed.
Low Equity Fees and Low Equity Margins
At the moment, mortgages of 80% (high LVR) or more either have a one-off fee at settlement or additional interest on your mortgage. It’s unlikely these will disappear, as banks carry huge risk on high-LVR mortgages and this is their compensation. Interest-only restrictions won’t disappear for the same reason.
In a Nutshell
High-quality first home buyers are the biggest winners with the removal of LVR funding restrictions. Investment property buyers will also benefit in time, but there’s a wait to see how post-lockdown NZ shapes up. Either way, borrowers will still need to meet the bank’s criteria for good and stable income, and properties purchased will need to be high-quality low-risk homes.
Need help with your next property transaction?
If you need help with your next property transaction, get in touch with Alex, Mark, Priya, Pam and the team:
Phone: 07 871 7878